Protecting your assets from creditors is essential in estate planning. Unforeseen liabilities can jeopardize your financial stability. Creditors can come from various sources such as,
- Negligence claims, motor vehicle claims more than insurance limits, income tax assessment, or unpaid taxes.
- Sole proprietors and general partners in a business/profession are vulnerable to business/partnership creditors.
- Personal guarantees from shareholders may be required for corporate lending.
- Family members/dependents, where adequate support wasn’t provided could sue an estate.
Various strategies are available to protect assets from creditors.
Incorporating a business: If you are a business owner, then this strategy won`t protect your personal assets completely but it adds a layer of protection.
Registered plans: The federal government provides protection to registered disability savings plans (RDSPs), RRSPs, RRIFs, and deferred profit-sharing plans (DPSPs), in the event of bankruptcy only. However, the contributions made within 12 months of declaring bankruptcy are not protected.
Registered Plans on Death (RRSPs and RRIFs): The proceeds of RRSP or RRIF are exempt from creditors of the deceased annuitant, where there is a named beneficiary. (Ref; Amherst Crane v Perring)
RESP: Except in Alberta, there is no creditor protection available for RESPs(Registered education savings plans).
TFSA & Non-registered accounts: Unless a TFSA or a non-registered account is set up under an insurance company and has a preferred beneficiary (spouse, common-law partner, child, parent, or grandchild), there is no creditor protection available.
Segregated funds – These investment funds are available with insurance companies and they do have creditor protection, provided the beneficiary is a spouse, child, grandchild, parent, or irrevocable.
Life Insurance – on Death: If the life insurance policy has a named beneficiary, the death benefit is generally protected from creditors under provincial law. If the beneficiary is an “estate” then the protection doesn’t apply.
Life Insurance – During Lifetime: if a spouse, child, grandchild, or parent of the life insured is named as a beneficiary then the life insurance policy and its cash value will be exempt from creditors.
It’s important to note that only the owner of a life insurance policy has creditor protection. Once the death benefit has been paid out to the named beneficiary, the funds may no longer have creditor protection if the beneficiary incurs debts.
Asset protection Trusts: You may consider this kind of trust(mostly offshore) if you have high net worth and you simply want to ensure that your assets are safeguarded against creditors for your beneficiaries. It’s essential to carefully draft the terms of the trust to get the advantage of adequate protection from creditors.