Segregated Funds and the Effects in Bankruptcy

Segregated funds are a type of investment vehicle that allows an investor to invest funds with a guarantee minimum return of initial capital. Segregated funds have a specified life span usually between 10 to 15 years. The investments are offered by insurance companies and the insurance companies are required to separate these investments from their other investment portfolios, hence the term segregated funds. The funds are invested by the insurance companies in a similar fashion as a mutual fund. They basically offer an investment vehicle with no risk of losing a specified percentage of your initial capital investment (usually in the 75 per cent to 100 per cent range).

Another key feature of segregated funds is the ability to have a named beneficiary. This will allow the investment to be terminated upon the death of the taxpayer and the proceeds paid out to the beneficiary without the need for probate. This type of payout is allowed prior to the scheduled termination of the segregated fund and the beneficiary will receive the funds tax free.

In an insolvency situation, segregated funds are treated similarly to insurance products, in that if there is a named beneficiary, the fund will be exempt from seizure. This makes the funds an attractive investment vehicle for those individuals who operate a business that may be exposed to creditors.

There are two major disadvantages to segregated funds:

1. Management fees tend to be higher than other investment vehicles. In some cases, the management fees can be double what they are in other similar type mutual fund investments.
2. Your investment is locked in, for a certain length of time, usually 10 to 15 years.

Basically, segregated funds are a hybrid of insurance and mutual funds and it is this similarity to an insurance policy and the fact the plans are offered by insurance companies, that enables them, in most situations, to be considered an exempt asset in a bankruptcy situation.

Debt can be overwhelming. Contact your local MNP debt professional for a free, no-obligation consultation. We can help you understand which debt solutions are available based on your unique situation while ensuring you have a clear understanding of how the options available to you will impact your investments.

Joel Kideckel is a Licensed Insolvency Trustee serving our Oshawa region. To learn more about how MNP Debt can help you, contact our local office at 905.436.9830.