The extensive role of charitable organizations in society is obvious, as is the fact that much of their funding is from private sources. Making a gift to a charity during one’s lifetime or in one’s will has two positive results: the charity and its goals are advanced and the donation can be used to reduce income tax. With respect to this latter benefit, it is important to recognize that one’s net assets will still be reduced notwithstanding that less tax will have been paid. Ideally, therefore, one couples both goals when deciding to make a charitable donation. Individuals are increasingly interested in achieving these goals through their wills, and it is on testamentary charitable gifts that this article will focus.
A charitable gift made in a will is deemed to be made in the year of death and can therefore be claimed against the final tax return of the deceased. Such a gift has an advantage over gifts made during lifetime since the gift, and hence the deduction, can be up to 100 per cent of income. In other words, a charitable gift can be used to fully offset the income tax otherwise payable in the year of death. Furthermore, any unused amount can be carried back to the previous year.
Charitable gifting can be used as part of an overall estate plan. For example, if an individual knows that his or her death will trigger significant capital gains due to the deemed disposition of an asset, then the person may wish to consider having life insurance. Upon death, the proceeds from the life insurance policy can be used to cover the capital gains. A somewhat more creative option is to have the life insurance proceeds paid to a charity: the resulting credit for that donation can then be used to offset the capital gains. Of course, one achieves the additional benefit of advancing the goals of the charity.
Another interesting option is to combine a testamentary trust with a charitable gift. This option is known as a charitable remainder trust. In simplest terms, the will creates a trust and names a beneficiary who has a life interest in the trust. Once the beneficiary dies, the assets of the trust are donated to a charity. It is vital that the trust comply with the requirements set by the Canada Revenue Agency set out in the income tax interpretation bulletin IT-226R. These requirements are as follows:
- There must be a transfer of property voluntarily given with no expectation of right, privilege, material benefit or advantage to the donor or a person designated by the donor.
- The property must vest with the recipient organization at the time of transfer. A gift is vested if:
-the person or persons entitled to the gift are in existence and are ascertained,
-the size of the beneficiaries' interests are ascertained, and
-any conditions attached to the gift are satisfied.
- The transfer must be irrevocable.
- It must be evident that the recipient organization will eventually receive full ownership and possession of the property transferred.
Two primary goals of these requirements are that the property has been given away and cannot be called back and that the value of the property that the charity will receive is calculable when it is given. If the CRA requirements are met, then a tax receipt will be issued when the trust is created to offset income on the deceased’s final tax return.
When planning to make gifts to a charity in a will, two other important considerations are the Wills Variation Act and planning for the possibility that the selected charity may no longer exist in the same form or at all, as when the will was made. The Wills Variation Act entitles a child or spouse of a testator to challenge a will that fails to make adequate provision for them. This means that a spouse or child could challenge a charitable gift, especially where that gift is a substantial part of the deceased’s total estate. One must also consider the possibility that the selected charity might no longer exist at one’s death or that it might have been absorbed by one or more successor organizations. In order to ensure that the charitable gift does not fail, the will should include a provision permitting the executor and trustee to direct the charitable gift to another organization with objectives similar to those of the original charity selected by the testator.
A well-planned charitable gift can be a valuable part of an estate plan. Such gifts can fulfill altruistic goals, form part of a tax minimization strategy, or achieve both ends. As always, careful planning is required and will often involve both legal and accounting professionals.
MAY 2011 SENIOR LIVING MAGAZINE VANCOUVER ISLAND