Client, Nominee and other Dealer Account Structures: Estate Planning and Creditor Protection Considerations for insurance based products Part ll

As mentioned in my last article, investors working with dealers can hold units or shares of investments that may be held in one of three ways:

1. Client name

2. Nominee name

3. Trusteed registered plan (TRP)

Let's delve a little deeper into each of these.

Client Name Accounts

These accounts are recorded in the client’s name. They are sometimes referred to as “off book” since they are not reflected or recorded as assets on the books of the dealer. The client can deal directly with the issuer of the investment or through the dealer. The insurance company maintains much of the records of the client’s investments and communicates with the client including the provision of statements of accounts. Statements are generally not consolidated.

Nominee Name Accounts

These accounts are recorded by the issuer of the investment as being registered in the name of the dealer. They are thus referred to as “on book” investments. The issuer, an insurance company, records the client’s name (dealer as nominee for particular client). The insurer takes instructions from the dealer regarding such things as purchases, transfers and redemptions. The dealer is responsible for maintaining records of the client’s investments, deposit and trade confirmations and investment statements. The dealer is also responsible for communicating with the client and providing statements of accounts.

Creditor protection and other valuable insurance features may or may not exist depending upon the nature of the contractual arrangements between the insurer and the dealer.

The holding of insurance based investment products in “nominee name” may have implications on certain important features of the life insurance product such as “creditor protection” and probate status. (see Investment Dealers Association of Canada (IDA), Notice FC98-29 Dec. 22, 1998). The legal status of the account could make a significant difference. In any situation where one person holds or deals with another’s property, their legal status is either that of trustee or agent. The trustee holds legal title to the property while the agent simply has the authority to deal with the property on behalf of the client. Creditor protection and other valuable insurance features may or may not exist depending upon the nature of the contractual arrangements between the insurer and the dealer. The opening account agreement between the dealer and the client could also affect the result.

It is very important to understand the ramifications of the differences between the relationship of the dealer to the assets held in nominee account. The dealer may act as:

• trustee holding legal and not beneficial title or

• as an agent of the policyholder.

At Empire Life for example, the legal and beneficial owner of the contract is the "contract owner" or "policy owner" (i.e. the end-client). The contract owner authorizes the nominee (i.e. a dealer) to instruct the insurer, after which the insurer can accept instructions from the nominee. Put another way, the nominee acts as agent for the contract owner. The policyholder is the legal owner for all insurance contracts, taking on the characteristics of a “client name” account except for trusteed registered plans. As such, the legal relationship is governed by the contract between the insurer and the policyholder. The client is the policyholder regardless of whether the account is set up in client name or nominee name.

In Quebec, the Civil Code only recognizes formal trusts where the legal ownership of the assets is transferred to the trust patrimony. (s. 1260 Civil Code of Quebec)

Segregated funds permit the naming of beneficiaries for registered and non-registered plans.

Trusteed Registered Plans

Registered investments like securities and mutual funds, including Registered Retirement Savings Plans (RRSPs), Registered Retirement Income Funds (RRIFs) and Tax Free Savings Accounts (TFSAs) may be held in a trusteed registered plan, for the benefit of client investors. This may result in the investments receiving some creditor protection under the Bankruptcy and Insolvency Act and specific provincial rules and regulations. Trusteed registered plans permit the naming of beneficiaries across Canada outside the province of Quebec.

Segregated Funds

Segregated funds permit the naming of beneficiaries for registered and non-registered plans. There is no need for a trustee unless particular circumstances drive the objectives and concerns of the policy owner. Provincial insurance laws state that the proceeds of these funds on the death of the annuitant, pass directly to the named beneficiary(s) and do not form part of the estate of the policyholder, bypassing both probate and creditors and claimants of the estate. It’s important to note that the courts are divided on this issue, particularly with non-insurance based registered investments when a beneficiary has been named.

© 2024 by peter a Wouters

Related Articles:

Client, Nominee and other Dealer Account Structures: Estate Planning and Creditor Protection Considerations for insurance based products Part l

The material in this article is current as of the date published. This material is presented for informational purposes only, and is not a legal, tax or investment opinion. The provision of the information contained herein and any oral or written communication regarding the same should not nor is intended to be construed as such. Interested persons should seek and retain independent professional advice before acting or foregoing action in relation to any of the matters mentioned herein reflected as of the date published or updated.