How are Segregated Fund distributions handled?

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Distributions are received by the segregated (seg for short)) fund from the assets held, such as stocks and bonds. Depending on the assets held, distributions could include Canadian dividends, foreign income, other income, and capital gains. A seg fund may also realize capital gains upon a disposition of fund assets (including redemption of seg fund units). It is also possible for a seg fund to incur capital losses on the disposition of fund assets. Seg fund income as well as capital gains and losses are allocated each year to the contract holders.

Tax rules that apply to seg funds are quite complex, especially when a spouse dies who holds a seg fund contract in an RRSP. However, there are tax strategies that your insurance advisor can develop to make the use of seg fund’s ability to establish a policy beneficiary.

You may be a good candidate for seg fund use if:

  • You are a conservative investor and yet want higher returns than GICs offer.
  • You are a pre-retiree who needs growth, but can’t afford to lose money over the long term.
  • You are a senior who requires estate protection and certain capital guarantees.

How can indebtedness jeopardize a business?

Business Banking relationships are important. If a business owner who has a good relationship with his bank were to die, chances are the bank may call the loan if the business begins to experience financial duress and defaults on repayment. Many businesses have no option but to acquire a bank loan collateralized by the full value of their assets in order to financially survive.

  • Avoid collateralizing personal assets. Where the loan equals or exceeds the value of the business assets and/or personal assets, the prospect may not be favourable.
  • Following established rules, a bank may ask a business-owner to collateralize a loan, not just with business assets, and land, but with additional personally owned assets which may encumber a wife’s co-owned assets.
  • Add to that, a possible collateralizing of any assets of a son or daughter (and spouses), who also share in family business ownership.
  •  Family members of small business owners can also lose their financial security if the business defaults on loan repayments.
  • If you own a business, avoid being held a financial hostage by the lending institution or forced into liquidation.

Life insurance can reduce these risks associated with debt in family businesses:  You can solve this to a degree in a family business such as a farm, by insuring the oldest owners and succeeding generations using joint-first-to-die life insurance policies or individual plans. Where there are non-family businesses, each owner/partner should be insured to cover debt. When the life insured dies, the tax-free life insurance proceeds can be used to pay back loans, and essentially win back ownership and discharge any liens of personally owned assets.

What if there is a Critical Illness?  Also, for the same reason, consider purchasing a Critical Illness Insurance policy on each of the principal business owners and key persons. This product can provide a very large sum of money to pay off debt if one were to experience a major illness such as heart attack or stroke. If an individual were to be incapacitated, he or she may need to be bought out by a partner or an heir (there should be a buy-sell agreement in place). The risk of a loan being called increases when an owner-manager is critically ill and the bank manager loses confidence in the stabilizing influence of that owner.