Kelly is on ODSP. She recently received $80,000 in an inheritance from her mother’s estate. This money threatened her ODSP because single people with no dependents are not allowed more than $40,000 in assets. She thought she would lose her ODSP. Her ODSP caseworker told her she would have to either put the money into an ODSP “exempt asset” or lose her ODSP.
Kelly and I sat down to discuss her options. We reviewed a number of ODSP exempt assets, deciding a segregated fund account made the most sense for her.
Under most circumstances, a person on ODSP is allowed to have up to $100,000 in a segregated fund account. Most people are not aware segregated funds are an ODSP exempt asset, including many ODSP caseworkers. When I explained this was an option for her, Kelly was glad the option existed but wanted to know what was a segregated fund.
Most people are familiar with mutual funds which are very similar to segregated funds. Both are investments that invest a large pool of money in a variety of stocks, bonds and other securities. One of the fundamental principles of prudent investing is diversification. Purchasing only one investment, such as stock in a large bank means you live and die by the performance of that one stock. Buying many different stocks and/or bonds spreads the risk. Mutual funds and segregated funds offer that diversification.
There is a wide variety of segregated funds to choose from, including very conservative ones that hold guaranteed investments (e.g. GICs) and government bonds. At the other end of the spectrum there are aggressive segregated funds that invest entirely in stocks. Similar to mutual funds, there are many different segregated funds to satisfy different levels of investment risk and interest.
Segregated funds differ from mutual funds in some key ways. For one, segregated funds are sold exclusively by insurance companies. From a regulatory perspective, a segregated fund is an insurance product, formally known as an Individual Variable Insurance Contract (IVIC) and is governed by the Insurance Act. However, a segregated fund does not act like your typical insurance product. A person does not purchase a segregated fund with the expectation that a predetermined and much greater amount of money will be paid to a beneficiary at death. As I said, it behaves like a typical investment.
Unlike mutual funds, segregated funds offer death benefit (depending on the contract, your beneficiaries will receive 75% to 100% of your contributions tax free when you die) and maturity guarantee options (depending on the contract, 75% to 100% of your principal investment is guaranteed if you hold your fund for a certain length of time to benefit from the guarantee). Segregated funds also allow the investor to name a beneficiary even if it is a non-registered investment (i.e. it is not in an RRSP or TFSA) and are creditor protected*
*There are some exceptions where creditor protection will not be upheld.
Loved the post! Segregated Funds also help those on ODSP to “save” .If because of work or other extra income and also because you have minimum expenses (say you live at home and pay no rent?), you have difficulty staying under the $5,000 maximum assets limit? Investing in Segregated Funds (which are not assets) will help keep your bank balance under the (ridiculously low) maximum figure. Later in life say when on CPP and OAS (and off ODSP) you can access your segregated funds.
To clarify, segregated funds are assets, but they are allowable up to a certain amount. Yes they can be used as a savings tool. You can wait until you are off ODSP to start drawing on the funds in a seg fund account, but you can also withdraw money from it earlier than that. You just have to be mindful of the limitations set by ODSP. A person on ODSP is allowed to receive up to $6,000 in a 12 month period (including money from their own seg funds) to pay for “non-disability related items and expenses.” There is no limit on how much they take out of a seg fund account if the money is used for another exempt asset or for “disability related items or expenses.”
How does one find out who sells seg funds?
Licensed life insurance agents such as myself sell segregated funds.
If the segregated funds are in a TFSA, as long as the amount is under $40,000, is it still ok and not interfere with ODSP?
Segregated funds up to $100,000 are exempt all on their own. This is separate and apart from the $40,000 basic exemption. It doesn’t matter if the segregated funds are in a TFSA, a non-registered account, or an RRSP.
For example, a single person with no dependents on ODSP could have up to $100,000 in segregated funds, regardless of the account type, plus up to $40,000 in other assets that are subject to the basic exemption.
It is advisable to speak with a professional who understands ODSP policy directives before making any financial/investment decisions.
I just recently read this post and am intrigued by this as it could assist many of my clients.
However I am unsure of why a segregated fund would be an exempt asset. Does this fall under section 28(1) 20 of the regulations? If not there, where.
Cheers
Andrew
Hi Andrew. A segregated fund is an insurance contract. It is otherwise known as an Individual Variable Insurance Contract (IVIC). As a result, it is treated by ODSP the same way as cash value in a life insurance policy. Segregated funds are not explicitly named in the legislation, however ODSP has clearly stated they are to be treated the same as cash value in a life ins policy in Policy Directive 4.8.
Hi Ron,
This post is very informative.
Say you inherit more than $100,000. For example, $150,000.
Can you put $100,000 of that into an inheritance trust AND then the remaining $50,000 into segregated funds, WITHOUT affecting your ODSP entitlement?
If so, must the $50,000 that you put into segregated funds be put into segregated funds that have no cash surrender value?
Thank you for your help and advice.
Unfortunately a person on ODSP is not allowed to have $100,000 in an inheritance trust and then have more money in a segregated fund account. The most you can have combined between the trust, segregated funds and cash value inside a life insurance policy is $100,000.
As an aside, cash surrender value is not something that really applies to segregated funds. If you have $50,000 in a segregated fund account, that is the amount that is in the account. There isn’t another amount in the account. As such, the surrender value really is the amount you invest, plus or minus investment gains or losses.
That really helps clarify things. Thank you!
Hi Ron, It’s seems there is no insurance company which offers segregated funds RDSP. When I check govt website, it only most major financial institution but no insurance company in there. Is that true ?
At the current time, I do not know of any insurance companies that offer segregated funds inside an RDSP. That might change at some point. However, I am not convinced segregated funds are ideal investments for an RDSP account in most circumstances. The management fees for segregated funds are higher than mutual funds and other types of investments that can currently be purchased in an RDSP account. Seg funds do offer specific benefits that mutual funds don’t, but those benefits are not that relevant for most people with an RDSP. So, it really depends on the situation.
Ron, can you please clarify if it is then better to put any inheritance directly into an RDSP vs a seg fund, as income drawn from a RDSP would be exmept and not subject to the annual limits
The fundamental factor (but not the only factor) I consider is when withdrawals can be made from the RDSP without penalty. If the person needs money sooner than later, putting all the money in an RDSP where withdrawals will not be penalty-free for many years, is a significant issue. Yes ODSP treats withdrawals from an RDSP more favourably than ones made from a seg fund account, but seg fund accounts can typically be set up to allow for immediate access without penalties.
There are other issues to consider, such as contractual capacity. If the person on ODSP does not have the legal capacity to enter into a contract, their ability to be an account holder of a segregated fund account may not be allowed.
You should discuss your situation with an advisor that understands RDSPs, ODSP and segregated funds.
All the example that you have discussed here for segregated funds are about an ODSP recipient receiving an inheritance. To my knowledge, trust funds can only be open for an ODSP recipient in case of an inheritance. Is it the same restriction for segregated funds? or can a segregated fund be open at any time by an ODSP recipient? I am thinking of two specific cases:
– an ODSP recipient sell his/her house (exempt asset) but does not want to buy a new house. He/she can open a segregated fund with the equity left after the sale, anybody can, but would that fund treated as exempt asset by ODSP?
– somebody wants to give a large gift of money to an ODSP recipient. Can it be put in a segregated fund?
Unlike a testamentary trust that can be funded only by the proceeds of an inheritance or a life insurance policy, a segregated fund account can also be funded by other (but not all) sources. The proceeds of the sale of a house and a gift can be put into segregated funds and be treated as exempt by ODSP as long as the sum total of all segregated funds, annuities, deferred annuities, cash value life insurance and assets in trusts (not including Henson Trusts) do not exceed $100,000.
Hi Ron,
What is the difference between a Henson Trust fund and a segregated fund account?
Is there a $100k max for both? And, are there management fees for both?
I’m considering getting one or the other for my 55 yr old brother on ODSP.
He has mental health issues and would need someone to manage his money.
A Henson Trust is not an actual investment product. It is a legal arrangement that allows you to set up formal trust accounts at a financial institution (and/or hold other types of assets in the name of the trust, such as real estate). It can hold pretty much any type of investment, including stocks, bonds, mutual funds, GICs, money in a bank account, etc. ODSP sets no limit on the amount a Henson Trust can hold. However, if your brother has received an inheritance, you can’t set up a Henson Trust unless there were instructions in the will associated with the estate he is receiving money from to set up a Henson Trust, the executor of the will can’t set one up and expect ODSP will recognize it as a legitimate and treat the holdings as exempt assets. This really is a legal question, though, and you should consult a lawyer for advice.
A segregated fund is a particular type of investment, sold by insurance companies. It just so happens that ODSP allows recipients to hold a maximum of $100,000 in segregated funds, subject to some conditions, without affecting ODSP eligibility. While the assets in a Henson Trust are managed by trustees and are not held in the beneficiary’s name (i.e. your brother), the assets in the segregated fund account would be held in his name. If he does not have legal capacity to manage his own finances, somebody else may be able to manage the account if they have Power of Attorney for property for your brother or guardianship.
About fees…there are always costs involved. A Trust doesn’t have investment management fees in and of itself, but it can hold investments that have management fees. You also have to file taxes for the trust, and you may need the help of a lawyer which would cost as well. Segregated funds have Management Expense Ratios (MERs) just like mutual funds.
To figure out what is best/suitable, you should consult with a lawyer or a financial advisor who has a very strong understanding of ODSP.
Hi Ron
I had a parent pass away and will now be collecting inheritance in excess of $100k. I plan to put up to the allowable amount in a segregated fund, however I am unsure what my options are with the remaining assets including proceeds from a house sale without effecting my ODSP payments. Any suggestions?
There are a number of factors that determine what you might be able to do. In addition to the 100k in segregated funds, the recent increase in asset limits from $5,000 to $40,000, allows you to hold onto more money. If you have the disability tax credit, you would be able to put money in an RDSP as long as you meet the age requirement and haven’t used up all the contribution room, if you already have an RDSP. The latest a contribution can be made to an RDSP is December 31st of the year the person turns 59. The most you are allowed to contribute to an RDSP in the person’s lifetime is $200,000.
Be aware that, even if you are able to put the money from the inheritance into exempt assets, you still may lose a month of ODSP, because the amount you are receiving is greater than $10,000. A person on ODSP is allowed to receive up to $10,000 in gifts and voluntary payments in a 12-month period for non-disability related expenses. The money received from an inheritance is subject to this rule. It seems that ODSP workers have the discretion to wave this rule in certain circumstances.
Determining which type of accounts and how much you should put into each depends on your short-term and long-term needs and other factors. I suggest talking to an advisor who understands ODSP, the RDSP and other related matters would be worth your time. You can contact me, if you would like to discuss.
Hello Ron,
I looked into what the segregated funds are, and it appears that the OSDP recipient cannot really benefit from them. The segregated funds can be made for the ODSP recipient, but the benefits are payable only after the beneficiary dies. What is the use of them? Can the person take the money out of them when they are alive? The life insurance seems to work the same way, the benefits came in only after your death. Is that correct? If not, how exactly can the segregated funds be beneficial for ODSP recipients? Thank you!
Yes you can make withdrawals from a segregated fund account. We manage segregated fund accounts for clients who are on ODSP who withdraw money from those accounts, regularly. Segregated funds are a very useful tool to supplement ODSP income.
While ODSP recipients can access money from their segregated fund account, ODSP limits the amount of money a person can receive in gifts and voluntary payments over a 12-month period, depending on how the money is used. Withdrawals from a segregated fund account are considered voluntary payments.
This blog post helps explain the limits:
What You Need to Know About ODSP
Hello Ron, Thank you for your article. My scenario is a received inheritance of $50,000. Could you clarify a little more for me the comment that a person may lose a month of ODSP because they are receiving a gift greater than $10,000.
portion allocated in to a TFSA & balance into non-registered Seg?
If a person on ODSP receives more than $10,000 in gifts or voluntary payments in a 12-month period where the money is not used for disability related expenses, the amount received in excess of $10,000 is considered income in the month it is received, reducing ODSP income dollar-for-dollar. Let’s assume a person on ODSP has not received any gifts in the past 12 months and then receives a $50,000 inheritance which they deposit into a segregated fund account. $10,000 of the inheritance would not be considered income, but the other $40,000 of it would be considered income in the month it is received, which would reduce their ODSP in that month, dollar-for-dollar. Since $40,000 far exceeds what they receive from ODSP on a monthly basis, their ODSP income for that month would be reduced to zero.
Hi Ron:
Can ODSP recipient put money into segregated funds TFSA on a monthly basis?
Will this be considered an exempt asset ?
Segregated funds held in a TFSA are still considered ODSP exempt. As long as the recipient does not exceed $100,000 between segregated funds, annuities, deferred annuities, cash value in a life insurance policy and a disability inheritance trust, combined, there should be no issue if they put their own money into the account. If the money deposited into the segregated fund account comes from a third-party, friend, family member, that money would likely be considered a gift. There are restrictions on the amount an ODSP recipient can receive in gifts over a 12-month period. You can read about the treatment of gifts here. I talk about two key ODSP rules in the article. The first one is about the $40,000 asset limit. The 2nd rule talks about how much money one can receive over a 12-month period.
Thank you for your reply. The money is not coming from a third party.
Mr. Malis,
After reading, your informative article “Segregated Funds Saved My ODSP”, dated: Dec 14th, 2014, I have the following questions:
(1) Could a “Personal Injury Settlement” (still negotiating, so, not yet finalized, and I am unaware of all the ODSP policies, with this type of (payment) award) be deposited to a Segregated Fund?
(2) Currently, in (2019), are “Segregated Funds” still a resource, under Doug Ford’s government approach to ODSP?
Comment:
Like you, I am still unaware (August’2019) of ALL the changes that (Ontario) Doug Ford’s government are going to implement
in the coming year with regards to ODSP? (Especially, with the Ministry (portfolio) change, from Lisa McLeod to Todd Smith, so it somewhat challenging to know how to proceed. In my view, caution is probably the best course of action, until all is unveiled.)
Cordially, “dpi”
Generally speaking, yes an award can go into segregated funds, but it might not be the best place for it. Personal injury settlements can consist of awards for different types of damages, such as pain and suffering, loss of past income, and loss of future income. Awards for the various types of damages are treated differently by ODSP. Depending on the amounts and types of damages included in the settlement, determining the most suitable strategies can be quite complicated, given the various ODSP rules.
You might be interested in another blog post I wrote about the treatment of awards for pain and suffering ODSP and Personal Injury Settlements
Segregated funds, subject to certain limits, are still exempt. The Ford government has made no mention of eliminating or modifying this exemption.
Do you by any chance know if Segregated Funds are considered an exempt asset by Ontario Works?
I have looked at the Ontario Works policy directives. It seems segregated funds are not considered an exempt asset by Ontario Works. I was not able to find anything specifically speaking to the treatment of segregated funds, which leads me to believe they are not exempt.
Thank you for making this article.
This information helped me understand my financial advisors suggestion of creating a segregated fund for myself while I am attending post secondary education and investing for my future while on ODSP.
I finally feel like I am in control of my finances and well-being
Hi Ron
Can you advise if having a segregated fund is beneficial for someone who is NOT on ODSP and why?
Thank you
There are many reasons why somebody not on ODSP might invest in segregated funds. Segregated funds offer some guarantees other types of investments do not.
There is much to be said about the benefits of segregated funds, but here is a very high-level overview of some of the central benefits.
Typically, segregated funds come with a death benefit guarantee that guarantees the beneficiary will receive at least 75% of the principal amount invested less any withdrawals made, in the event of the annuitant’s (account holder’s) death. Example: Suzanne invests $100,000 in segregated funds that provide a 75% death benefit guarantee. She names her son, Allen, as the sole beneficiary of her segregated fund account. The segregated funds she selects are more aggressive and volatile than most other segregated funds. Soon after she invested her money, there is a recession and the value of her segregated funds decline by 40% bringing their value down to $60,000. She then dies as a result of an accident. Since she never withdrew any money from her segregated funds, the insurance company is required to pay the beneficiary (her son Allen) $75,000 even though the segregated funds in her account were worth only $60,000 because of the 75% death benefit guarantee. If Suzanne’s segregated fund investments declined by only 20% where they would be worth $80,000 at the time of her death, the insurance company would pay out $80,000 to her son.
It is also possible to buy segregated funds that offer 100% death benefit guarantees, where the beneficiary would receive at least the amount invested less any withdrawals. The investment fees are higher for segregated funds with 100% death benefit guarantees.
Similar to the death benefit guarantees, segregated funds offer maturity guarantees. Most segregated funds have a 15-year maturity period where the insurance company will provide 75% of the amount invested less any withdrawals made during the 15-year period, if the value of the segregated funds is less than 75% of the amount invested less any withdrawals at the end of the 15-year period. Example: Suzanne invests $100,000. During the next 15 years she withdraws $10,000. At the end of the 15-year period, her segregated funds are worth $50,000. The insurance company is contractually obligated to pay Suzanne $67,500. She invested $100,000 and withdrew $10,000 during the 15-year period. Thus the insurance company is obligated to guarantee 75% of $90,000 which would be $67,500. It is possible to purchase segregated funds that offer 100% maturity guarantees, but the investment fees are higher.
Segregated fund accounts allow you to name a beneficiary on non-registered accounts. While an investor can name a beneficiary on RRSP and TFSA accounts, regardless of the type of investments, the same can’t be said for non-registered accounts. An investor is not able to name a beneficiary on a non-registered account that holds mutual funds, ETFs, stocks, and/or bonds. Because segregated funds are technically insurance products, an investor can name beneficiaries directly on a non-registered account holding segregated funds. As long as the beneficiary designations are done correctly, the value of the account would be paid out to the beneficiaries, directly, rather than becoming part of the deceased’s estate where it would be subject to probate and estate administration fees.
Segregated funds also offer a measure of creditor protection. This is not fool proof creditor protection, especially if the segregated funds are purchased to avoid creditors.
If a person is 59 in 2023 and on ODSP. Who already has some money in RDSP (cannot make deposit after Dec 31). Can I still be permitted to purchase segregated funds without affecting ODSP? If so, can the segregated funds be up to 100K OR, 100K- RDSP?
The RDSP and segregated fund asset exemption rules are entirely separate. The amount one might have in an RDSP does not reduce the amount in segregated funds ODSP treat as exempt. The segregated fund exemption limit would be reduced by annuities, deferred annuities, cash surrender value of a life insurance policy, and/or a disability or inheritance trust (not to be confused with a Henson Trust).
No withdrawals were made. LDAP payments start at age 60 without penalty. To get the DAP – discretionary withdrawals, do our contributions have to be more than government grant & bond? Any rules?