A client aged 55 who invests $100,000 in BMO Lifetime Cash Flow will receive $6,000 per year in the form of monthly payments for 15 years starting from his 66th birthday.  At the end of this term he will have received a total of $90,000. These payments are not taxable for the client outside an RRSP because the bank is returning the client’s own principal.

On the 26th year, the client’s account will have a balance of $10,000 in principal-- the difference between the initial deposit of $100,000 and the total payments of $90,000. The $10,000 will remain invested and intact until it is transferred to the estate. The returns earned by the account are also reinvested and passed along to the heirs.

Starting from the 26th year, the bank honours the payments.  The amounts it pays during this period are taxable for the client outside the RRSP because they are considered interest payments. Clients with RRSP accounts will pay the marginal income tax rate.  At the client’s death, the balance is transferred to the estate.  The client can appoint a beneficiary, but the account balance is not protected from creditors once it is transferred to the estate.

“The product is a useful estate planning tool. The estate will receive at least $10,000 no matter what happens. However, if the account has generated a return of 6% during the ten years it was locked in, the capital of $100,000 will have doubled. Payments will still be limited to 6% of the initial capital, namely $90,000. On the 26th year, $110,000.00 will remain in the client’s account.  This amount will be reinvested to benefit the estate,” Serge Pépin, Director, BMO Investments explains.

To cover the payments that it pledges to make starting in the 26th year, the bank will buy insurance coverage in the form of an annuity.

Why payments of 6%? “Our studies have shown that higher than 6% could be difficult to sustain for a financial institution, while 5% is often not enough for the client,” Mr. Pépin says.

Amounts invested in BMO Lifetime Cash Flow are not protected by the Canada Deposit Insurance Corporation.  However, deposits in segregated funds, including GMW, are protected by Assuris.