It was the summer of 2011, and your client, Mr. Werner, called you to let you know that he would be receiving an inheritance of $900,000 sometime next month. He was 52 years old and had been a client of yours for many years. Mr. Werner wanted to take advantage of the potential growth in the equity markets, but he also wanted to make sure that his wife would not suffer due to a market downturn if he died when the markets had dropped. You recommended that he invest in some segregated funds that had a good track record regarding performance and that offered a 100% benefit guarantee at death and maturity. He agreed with your recommendation and made the investment upon receiving the inheritance, with him as the contract holder and annuitant, and his wife as the beneficiary. He purchased 30,000 units of a segregated fund at $30.00 per unit. The policy contract used a proportional basis for adjusting the amount of the guarantee if Mr. Werner made a withdrawal from the segregated fund.
One year later, Mr. Werner withdrew $30,000 from his segregated funds to pay for renovations in his house. On the day that he made this sale, the segregated funds were priced at $35.00 per unit.
Four years after the date of his investment (i.e. in 2015), Mr. Werner died. Unfortunately, the market value of his segregated funds when he died was only $810,000. Assume that there were no purchases and no distributions of any kind between the initial date of his investment and the date of death.
1-Who will receive the money from this investment and why? [2 marks]
2-What is the guaranteed amount (if any) at the time of death? [6 marks]
3-What is the value of the death benefit? [6 marks]
4-Assume that there were no distributions made by the segregated funds during the period when Mr. Werner owned them. What were the tax consequences of the segregated fund contract at the time of his death if the guarantee received is considered to be regular income? Explain. [4 marks]
5-If Mr. Werner lived in Ontario, where probate fees are charged, what amount would be payable by his estate on the segregated fund?