Skip to Main Content

A Compelling Estate Planning Solution

Edward Ku shares how many Advisors have utilized seg funds as a cost-effective value-add to simplify and expedite their clients’ estate planning needs – and simultaneously enhance their practice.

December 2021

Photo of Edward Ku

Edward Ku

Director, Intermediary Distribution, GTA North

Read bio

Segregated funds (seg funds) have been a long-misunderstood investment solution in Canada. Misperceptions about costly fees and features have epitomized how many Advisors have viewed them, resulting in their exclusion from client portfolios. The reality is – if you’ve not taken the time to consider this useful business building tool, you may have overlooked some key executorship benefits for your clients, particularly now as Baby Boomers seek ways to efficiently transfer wealth to the next generation.

3 ideal client segments, 3 optimal use cases

When asked by Advisors to pin-point the ideal clients for seg funds, I’ve historically identified three distinct segments as the ones who can benefit the most.

  1. Business owners seeking creditor protection for their personal non-registered assets
  2. So-called “GIC refugees” – risk-averse investors who traditionally invest in GICs, but are looking for alternative solutions in today’s ultra-low interest rate environment
  3. Seniors/retirees aged 70-85 looking for estate protection

It’s this third category – estate planning – that offers the most compelling case. And that’s due in large part to the ability to take non-registered assets, name a beneficiary on those accounts and then bypass probate, thus providing greater control for your clients on how their assets will be paid out from their estate. And in some circumstances, expediting this payout (which can happen in as few as two to three weeks) eases potential stress by helping to cover near-term expenses.

There are many inherent elements that make them an ideal investment option from an estate planning perspective. For starters, your clients can name multiple beneficiaries outside of their registered plan, enabling them to direct funds specifically to those they want to take care of (or their philanthropic causes) when they’re gone.

Secondly, this non-medical insurance solution also provides the added benefit of privacy for beneficiary recipients; unlike a public will, no one will know who has received the funds, or the amount bequeathed.

For starters, your clients can name multiple beneficiaries outside of their registered plan, enabling them to direct funds specifically to those they want to take care of…

Finally, the maturity and death guarantees associated with seg funds can also provide peace of mind for your clients as they get older. As a result, they can have some certainty that their assets will not diminish in any substantive way before they pass, protecting the legacy they’ll be leaving behind.

Case study: Complex family dynamics

When speaking with investment professionals on the benefits of seg funds, including the added control and confidentiality, conversation often turns to blended families, where one or both parents have children from a previous relationship. The reality is – as many Advisors have encountered in their businesses – over 40% of marriages in Canada end in divorce.1 Seg funds can provide the opportunity to equalize distributions to children from a first or second marriage, given that designated beneficiaries are a private matter that will not be disclosed.

Myth-busting: Fees...

One of the more common myths about seg funds is that MERs are much higher than those associated with traditional mutual funds. The BMO Guaranteed Investment Funds (GIFs) lineup is highly competitive with most investment products, from a pricing standpoint.

As an investment/insurance hybrid solution with three different guarantee options (and a variety of portfolio options targeted to client risk level), the most common BMO GIFs provide a hard floor on returns with a 75-100 repayment guarantee – 75% maturity/100% death benefit, which will pay out a lump sum. In a balanced mandate, for example, the MER would be 2.60% – and $250,000 would be the point at which they become more competitive, and a more impactful estate planning option, as the fee drops to 2.36% — in line with the average Canadian mutual fund.

$250,000 would be the point at which they become more competitive, and a more impactful estate planning option

What makes the BMO lineup highly competitive is that we use ETFs as the underlying assets to reduce cost, improve liquidity and more effectively hedge maturity risk guarantee. Being the second largest manufacturer of ETFs in Canada (and number one for net inflows over the last 10 years2) also helps to make our funds more attractive – an advantage over those who must seek out a partner in order to include ETFs in their seg funds, thus adding to the fees on their products.

… And other costs

Advisors should also note that bypassing probate – a key benefit – saves more than just those specific fees, which are often, in fact, not exorbitant. From my perspective, the more “costly” and overlooked element when settling an estate is time.

Completing probate in Ontario has historically taken around 18 months. In the current pandemic environment, where things have slowed down noticeably, it could potentially take two years for anything but the simplest case. Contrast that to seg funds, where beneficiaries are often paid within two to three weeks following the presentation of a death certificate. And even in Quebec, where probate is not a requirement, the waiting period can be lengthy and therefore just as burdensome; civil code does not set a particular timeframe for settlement, and the process is dependent on complexity.

However, timeframe isn’t the only consideration when contemplating probate; executor, accounting and legal fees are often substantive expenses worth making note of. When you add these up, they become more meaningful. That’s why investment professionals need to think broadly when considering the full implications of these estate costs.

It’s critical to be informed

Given the complexity of the estate planning process, and the variety of products available to clients, like testamentary trusts, it’s critical to be informed.

When it comes to BMO GIFs and the topic of investable assets, while $250,000 is the entry point where MERs become more cost-effective – in my experience the top end is up to approximately ~$3 million, beyond which your ultra-high net worth clients likely have more complex needs, with formal or informal trusts in place. That said, like most investments, seg funds are not an all or nothing solution.

BMO GIFs Features3

  • Monthly automatic resets (the policy’s principal updates without any monitoring – or stress)
  • Professional management with strategic/tactical asset mixes
  • Maturity and death benefit guarantees
  • Potential creditor protection
  • Private and efficient intergenerational wealth transfer, avoiding probate

It’s important to note that seg funds can’t be purchased by investors on their own on a self-directed basis. This offers you the chance to incorporate an enhanced insurance strategy into the conversation and increase your value add. By proactively educating clients and their beneficiaries on the advantages – particularly as a means to transfer wealth – you could not only retain those entering their estate planning years, but also help to create a next-gen relationship. (Pro tip! This can work in both directions – also ask the pre-retirees in your book, who are beneficiaries themselves, about their parents’ estate/retirement plans as a way to open the door to onboarding those prospective clients.)

For Advisors looking to estate planning and intergenerational wealth transfer ideas as a means to grow their book of business and solidify their revenue stream, seg funds offer both you and your clients a compelling investment/insurance hybrid solution worth considering. And by incorporating them into your practice, you can add tangible value for your clients, and the legacy they want to leave behind.

To learn more about BMO Guaranteed Investment Funds, contact your BMO Global Asset Management Regional Sales Representative.

To learn more on our full suite of BMO GIF investment strategies, click here.

1 Statistics Canada, 2020.

2 Bloomberg, December 2020 – BMO ETFs highest inflows 10 years in a row in the Canadian ETF industry.

3 Any amount that is allocated to a segregated fund is invested at the risk of the policyowner and may increase or decrease in value.

BMO Global Asset Management Disclosures:

BMO Global Asset Management is a brand name that comprises BMO Asset Management Inc., BMO Investments Inc., and BMO Asset Management Corp.

®/™Registered trade-marks/trade-mark of Bank of Montreal, used under licence.

Any statement that necessarily depends on future events may be a forward-looking statement. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. Although such statements are based on assumptions that are believed to be reasonable, there can be no assurance that actual results will not differ materially from expectations. Investors are cautioned not to rely unduly on any forward-looking statements. In connection with any forward-looking statements, investors should carefully consider the areas of risk described in the most recent simplified prospectus.

This article is for information purposes. The information contained herein is not, and should not be construed as, investment, tax or legal advice to any party. Investments should be evaluated relative to the individual’s investment objectives and professional advice should be obtained with respect to any circumstance. The testimonial(s) in this article may not be representative of the experience of other people/advisors. The testimonials are no guarantee of future performance or success. These are solicited testimonials.

BMO Life Assurance Company is the issuer of the BMO Segregated Funds individual variable insurance contract referred to in the Information Folder and the guarantor of any guarantee provisions therein. The BMO GIF Information Folder and Policy Provisions provide full details and govern in all cases. BMO GIF products are offered through BMO Life Assurance, a separate legal entity than BMO Global Asset Management and wholly owned by BMO Financial Group. Segregated funds are only available for sale by individuals with appropriate insurance licences and are not considered a mutual fund. Segregated fund fees are higher than mutual funds as they include insurance fees to provide for the guarantees on deposits at maturity or on death.

Follow BMO

®/™Registered trademarks/trademark of Bank of Montreal, used under licence.

BMO Global Asset Management is a brand name under which BMO Asset Management Inc. and BMO Investments Inc. operate. Certain of the products and services offered under the brand name, BMO Global Asset Management are designed specifically for various categories of investors in a number of different countries and regions and may not be available to all investors. Products and services are only offered to such investors in those countries and regions in accordance with applicable laws and regulations. BMO Financial Group is a service mark of Bank of Montreal (BMO).

BMO ETFs are managed and administered by BMO Asset Management Inc., an investment fund manager and portfolio manager and separate legal entity from Bank of Montreal. Commissions, management fees and expenses all may be associated with investments in exchange traded funds. Please read the prospectus before investing.

Exchange traded funds are not guaranteed, their values change frequently and past performance may not be repeated.

BMO Mutual Funds are managed by BMO Investments Inc., which is an investment fund manager and a separate legal entity from Bank of Montreal.

Commissions, trailing commissions (if applicable), management fees and expenses all may be associated with mutual fund investments. Please read the ETF facts, fund facts or prospectus of the relevant mutual fund before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.

For a summary of the risks of an investment in the BMO Mutual Funds, please see the specific risks set out in the prospectus. ETF Series of the BMO Mutual Funds trade like stocks, fluctuate in market value and may trade at a discount to their net asset value, which may increase the risk of loss. Distributions are not guaranteed and are subject to change and/or elimination.

Distribution yields are calculated by using the most recent regular distribution, or expected distribution, (which may be based on income, dividends, return of capital, and option premiums, as applicable) and excluding additional year end distributions, and special reinvested distributions annualized for frequency, divided by current net asset value (NAV). Distributions are not guaranteed, may fluctuate and are subject to change and/or elimination. Distribution rates may change without notice (up or down) depending on market conditions and net asset value (NAV) fluctuations. The payment of distributions should not be confused with a BMO Mutual Fund’s performance, rate of return or yield. If distributions paid by a BMO Mutual Fund are greater than the performance of the investment fund, your original investment will shrink. Distributions paid as a result of capital gains realized by a BMO Mutual Fund, and income and dividends earned by a BMO Mutual Fund, are taxable in your hands in the year they are paid. Your adjusted cost base will be reduced by the amount of any returns of capital. If your adjusted cost base goes below zero, you will have to pay capital gains tax on the amount below zero.

Distributions, if any, for all series of securities of a BMO Mutual Fund (other than ETF Series) are automatically reinvested in additional securities of the same series of the applicable BMO Mutual Fund, unless the securityholder elects in writing that they prefer to receive cash distributions. For further information, see the distribution policy for the applicable BMO Mutual Fund in the simplified prospectus.

Legal and regulatory disclosures

This information is for Investment Advisors only. By accepting, you certify that you are an Investment Advisor. If you are NOT an Investment Advisor, please decline and view the content in the Investor or Institutional areas of the site. The website is for informational purposes only and is not intended to provide a complete description of BMO Global Asset Management’s products or services. Past performance is not indicative of future results. It should not be construed as investment advice or relied upon in making an investment decision. Products and services of BMO Global Asset Management are only offered in jurisdictions where they may be lawfully offered for sale. The information contained in this Website does not constitute an offer or solicitation by anyone to buy or sell any investment fund or other product, service or information to anyone in any jurisdiction in which an offer or solicitation is not authorized or cannot be legally made or to any person to whom it is unlawful to make an offer of solicitation. All products and services are subject to the terms of each and every applicable agreement. It is important to note that not all products, services and information are available in all jurisdictions outside Canada.