Feb 01, 2013

Create Your Legacy (Part III)

Planned Giving in Action: Types of Gifts

In this series of articles presented in four parts, Mary and Karen will talk about estate planning and charitable giving. The information provided in this series of articles is illustrated with real life client situations (names changed for confidentiality reasons) as they progress through different life stages. Read Part I or Part II or Part IV.

In its simplest form, a charitable gift of a set amount of money is made in one’s will and the donation is received by the charity at the time of death. However there are other forms of giving that fall under the planned giving matrix, and the type of giving that is right for you depends largely on your charitable goals and financial circumstances.

Gifts by Will

One of the most simple and common ways to leave a gift to charity is to leave the gift in one’s will. The gift can be a set dollar amount (a legacy), or a percentage of your estate (part of the residue), or can be a specific item of property (a bequest). This is the most flexible approach to planned giving, as a gift in a will can be amended or revoked by a new will, or by a codicil (a document that amends a will). Such a gift in a will allows for the satisfaction of providing for a future gift while retaining full control of the estate assets while alive. On death, the deceased is deemed to have made the gift immediately before the date of death and a tax credit is available in computing tax payable in the terminal return for the year of death. Any unused tax credits in the year of death can be carried back and used to reduce taxes payable in the prior year. In addition, the credit is available to offset 100% of the net income for the year of death and the prior year. Such gifts are appealing to all individuals, but are quite attractive to older individuals with few or no heirs.

Life Insurance

Naming a charitable organization as a beneficiary under a life insurance policy is a popular way to benefit a charity you support, while providing a tax benefit to your estate. By naming a charity as beneficiary of a life insurance policy, you are responsible for the insurance premium payments under the policy. On your death, the named charity receives the proceeds of the policy. Your estate receives a charitable receipt for the insurance proceeds which can be used to offset taxes owed by your estate for the year of death.

Another option is to assign ownership of a life insurance policy to a charity during your lifetime, while the responsibility for the premiums remains with you. For the remainder of your life, you will receive annual tax benefits for the premiums you pay for which you will receive a charitable receipt. More complex arrangements involving sharing of some of the benefits of the policy or splitting the ownership are also used in some situations. Often individuals whose personal needs and family dynamics change are inclined to include life insurance policies in their planned giving scheme.

Gifts of RRSPs, RRIFs and TFSAs

Another popular option is to name a charity as the beneficiary of your Registered Retirement Savings Plan (RRSP), Registered Retirement Income Fund (RRIF), or Tax Free Savings Account (TFSA). In the case of an RRSP or RRIF, on your death, the fund is cashed, creating a tax liability to your estate. However, your estate will receive a tax credit for the charitable contribution, which will offset the taxes owing from the collapse of the fund. You will also receive the usual tax deduction by contributing to the RRSP throughout your lifetime. The tax benefits associated with this type of gift make it a popular choice for many people, but is especially appealing to single persons who have made adequate provisions for their beneficiaries through other assets. In the case of the TFSA, your estate will receive a tax credit for the charitable contribution.

Our client, Anne, is now in her sixties. Unfortunately, Anne’s husband, Phil, passed away at 58 from cancer. Anne returned to our firm to discuss her options for revising her estate plan so that upon her death, her estate is dealt with in a tax efficient manner, while expanding her philanthropic efforts in memory of her late husband and reflect her current financial situation. Upon Phil’s death, Anne received Phil’s life insurance proceeds. She also received all of his husband’s RRSPs on a rollover (i.e. tax-free) basis. These funds, in addition to the assets Anne owned jointly with Phil and the money remaining from Anne’s inheritance, has put Anne in a financial position in which she has more than she needs when she retires in a few years. Anne and Phil’s children are also financially stable at this time. Accordingly, Anne decided that she no longer requires that the money remaining in her RRSPs go to her children upon her death. RRSPs left to adult independent children are subject to a hefty amount of income tax. A better alternative for Anne was to name her favourite charity as the beneficiary of the RRSPs. By naming the charity as the beneficiary, the tax credit her estate will receive will offset the income tax payable when the RRSP collapses. This approach guarantees that more money ends up in the hands of the charity, and less tax is owed by Anne’s Estate.

Gifts of Tangible Property

Charitable gifts do not have to be in the form of cash or securities. Charities can also accept gifts of artwork, collections, automobiles, antiques, etc. The charity makes the decision whether the property should be sold or retained. Gifts of tangible property warrant a donation receipt, which offsets the capital gains payable by the estate in connection with the property on its disposition.

Gifts of Real Estate

Given the rise of real estate values in the last ten years, a gift of real estate to a charity can be a win-win proposition for the donor and the recipient. Real estate can be sold and the proceeds used for the charity’s current needs, or the property can be retained for use by the charity or future sale. Gifts of real property qualify for a charitable receipt. The charitable receipt can be used to offset the capital gain incurred on a non-principal residence, or can simply reduce the tax payable by the estate.

When amending Anne’s estate plan after the death of Phil, Anne made a point of determining the fate of the family cottage upon her death. The cottage was loved by Anne and Phil. However, their children lived too far away to enjoy the cottage on a regular basis, and preferred to spend their vacation time skiing, or holidaying down south. The only person that loved the cottage as much as Anne and Phil was Anne’s brother Bill. Anne discussed what should happen to the cottage after her death. Bill told Anne that as much as he loved the cottage, he simply could not afford to maintain it on his own, and would be forced to sell it if Anne gifted it to him in her will. This solidified Anne’s decision—the cottage, like the RRSPs, should go to charity.

Since the cottage is a second home and not a principal residence, its sale (whether it occurs before or after Anne’s death) will attract capital gains tax. By leaving the cottage to a charity, some of the capital gains Anne’s estate will pay will be set off by the tax credit the estate will receive from the charity.

We were also able to arrange with the charity to retain a life interest in the cottage for Bill, allowing him to use the cottage for as long as he was able to do so and permitting him to pay an occupancy fee. While there were additional complicated issues to be dealt with, the overall plan is a win-win for Anne and the charity.

Taking Action

There are numerous ways you can reach your philanthropic goals while benefitting you and your estate. Before settling on the type of planned gift you wish to make, it is important to speak to your legal and financial advisors, as well as the charitable organization itself so that a gift can be tailored to your financial and personal situation.

Read Part I or Part II.

Photography by kitieas4