When the annuitant dies with a named beneficiary (other than the estate), the death benefit is paid directly to the beneficiary. It does not form part of the deceased's estate.
Probate is the provincial court process that validates a will and gives the executor legal authority to distribute estate assets. Probate fees (officially called "Estate Administration Tax" in Ontario) are calculated as a percentage of the estate's value. By keeping the segregated fund proceeds outside the estate:
- No probate fees are payable on those proceeds.
- The proceeds are not delayed by the estate administration process -- payment typically takes weeks rather than the months or years that estate settlement can require.
- The proceeds are not subject to any claims against the estate (unless the estate is named beneficiary or a fraudulent-transfer challenge succeeds).
Will substitutes: Life insurance and segregated fund beneficiary designations act as will substitutes -- they govern who receives the proceeds regardless of what the will says. An outdated beneficiary designation can override a carefully drafted will. Advisors should remind clients to review beneficiary designations whenever family circumstances change.
Comparison with mutual funds: Mutual funds are held as securities in an investment account. On the owner's death the securities form part of the estate, pass through probate, and are distributed under the will or the rules of intestacy. There is no beneficiary designation on a mutual fund.