All about GIFs: Protection plus tax and estate planning advantages
Don’t forget to highlight the benefits of guaranteed investment funds, particularly for retirees or those who are almost there
By: DAVID ISRAELSON
Date: November 29, 2016
Guaranteed investment funds (GIFs), also known as segregated fund products, can play an important role as part of an overall investment strategy, says Jennifer Poon, director, tax and estate planning – wealth, at Sun Life Financial Canada. The benefits of GIFs can be especially attractive to certain types of clients, especially when it comes to estate planning, and in some cases, tax planning.
“GIFs may be more complex and may cost more than mutual funds, but they can provide useful features for many different types of clients, whether they are interested in creditor protection, investing that comes with some guarantees or integrating GIFs into their estate planning,” she says.
GIFs let clients invest in equity, bond or index funds while guaranteeing that a predetermined minimum value will be returned when the contract matures or upon the annuitant’s death.
“The aim of a GIF is to provide investors with some security by combining the features of an investment fund with an insurance policy,” says Sandra Foster, financial author and president of Headspring Consulting Inc.
“They are insurance products available only through advisors licensed to sell insurance,” she adds.
Though every client’s situation is different, there are certain investors who may benefit the most from investing in GIFs, says Ms. Poon.
“The first is risk-averse investors – people who don’t want to lose their money. With GIFs, the market value of their investment can go up or down, but a portion of the principal is guaranteed. Second are pensioners – people who need guaranteed income when they retire,” she says. “GIFs can be especially beneficial for retirees, in part because of how they help with estate planning.”
Like other insurance products, the death benefit from a GIF contract can bypass the time consuming and sometimes costly probate process if proper beneficiary designations are made.
“Not only can you save on probate fees, legal fees and accounting fees, you also don’t need an executor to receive the death benefit. There are significant changes to Ontario Estate Administration Act that places a lot of responsibilities on the executor. The idea of privacy; passing intergenerational wealth outside public record can reduce risks and provide ease of administration in a very emotional time for families,” says Ms. Poon.
Probate involves a provincial or territorial tax or fee that can cost beneficiaries up to 1.65 per cent of the estate, sometimes with no maximum. When a beneficiary is named, probate is not required. GIF proceeds can be paid to the named beneficiary without the delay of the probate process itself. (In Ontario, this delay can take several months; in some cases years.)
Some GIFs provide clients with guaranteed income for life, says Ms. Poon. The income these products provide can be tax-efficient.
“Each income payment for non-registered contracts are considered a draw [on the fund], so it’s taxed partly a return of capital and partly a capital gain,” she explains. Capital gains are taxed at a lower rate than ordinary income. For people who receive Old Age Security (OAS), a GIF payment can also help by not triggering a “clawback.” OAS payments are reduced by the government if an individual’s income exceeds a certain amount.
GIFs can also be structured to create a “do-it-yourself pension,” says Ms. Poon. This is noteworthy in an era when the defined benefit pensions enjoyed by earlier generations are becoming more and more rare. A smart retirement savings strategy is to hold a GIF with a deferred guaranteed income option in a TFSA. Most working families focus on company pensions or RRSPs; withdrawals from these are fully taxable and may trigger significant tax liabilities during retirement and at death. Holding a portion of guaranteed income in a TFSA provides tax sheltered growth as well as tax free withdrawals.
Building a pension-like income with a GIF is also worth considering as life expectancy in Canada grows. According to data from the Canadian Institute of Actuaries in 2014, 25 per cent of 65-year-old women and 17 per cent of 65-year-old men in Canada can expect to live beyond age 95.
On the other hand, those who want to retain capital and are counting on its return at the end of term don’t necessarily have to be old, she adds. Sometimes younger parents invest in guaranteed funds to build up a nest egg for their children’s education, or to store away baby bonus cheques.
GIFs can also offer protection from creditors, adds Ms. Poon. This makes them worthwhile for small business owners to consider.
Ms. Foster points out that while investment objectives for some GIFs are ultra conservative, they can be offered in a range, all the way to aggressive growth.
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