This blog post was written by: Diana Leopardi, Estate and Trust Consultant, Scotiatrust Montreal

Many people would have their cake and eat it too. Meaning, many people want to enjoy their retirement years while also plan for a lasting legacy to their next generation. How can this be done? What are some options?

An insured annuity is a tax efficient strategy that produces a guaranteed income stream for the duration of an individual’s life while protecting the original invested capital, in short; a life insurance policy alongside a life annuity. How does it work and what’s involved? Two contracts need to be purchased with an insurance company; a permanent life insurance policy and a life annuity. At the death of the insured, the annuity income ceases and the life insurance death benefit is paid tax-free to your beneficiaries to replace the capital invested in the annuity.

Another option is a life annuity. This differs from an insured annuity as there is no obligation to purchase a life insurance, therefore, no requirement to qualify for the said life insurance but also does not produce an income stream for the duration of the insured individual’s life. This type of annuity may be a strategy used in estate planning to stagger the distribution of capital to beneficiaries. The testator may utilize this strategy to avoid a lump sum distribution of funds and prefer to have that distribution spread out over a longer period of time. In particular with the great wealth transfer to come and many set to receive large inheritances, more and more parents prefer that their children receive smaller amounts over a longer period of time.

The advantages of annuities may include:

• reducing tax implications for your estate and probate fees (probate fees are not applicable in some jurisdictions),
• life insurance proceeds can be an additional asset to your estate,
• provide cash-flow throughout an individual’s lifetime (if considering the insured annuity option),
• spread out the distribution of funds to the beneficiary of an estate.

Potential disadvantages to consider:

• the individual needs to qualify (when referring to insured annuities),
• once approved and executed the contract can not be canceled or reversed,
• the annuity income will not change regardless of the interest rate nor will it take inflation into consideration. Therefore, if inflation is a concern, it may be prudent to index your annuity so that the income payments can increase to help offset inflation.

When planning for your estate and transfer of wealth it is important to understand the options that are available and what their potential impact might be. For example, both annuities and testamentary trusts can be used to stagger estate distribution of funds to the intended beneficiary, however, their set up and impact vary greatly. A trust is a much more complex legal structure whereas an annuity is a simpler legal contract. For a trust to be set up, the testator must consider appointing a trustee to manage the administration of the trust and prepare income tax returns, such responsibilities are not required for annuities. Moreover, a trust can provide legal protection (against creditors for example) as the individual person does not actually own the assets, whereas payment of an annuity is normally distributed in outright ownership to the annuitant. Therein lies the importance of details and ultimate objective sought out be the individual or client.

When navigating these important decisions, it is highly recommended to have a discussion with trusted professionals who can help answer questions and guide clients in making the right decision based on their personal needs and circumstances.