Creating an estate plan with the assistance of professional advice is an excellent way to ensure that your financial affairs are in order, your wishes are respected, your family is taken care of on your death, and your estate is not burdened with excessive costs and taxes. The peace of mind created by a professionally drafted estate plan tailored to your specific needs, wishes and financial situation, is often incentive enough to create such a plan. However, there is yet another reason why taking the time to plan your estate can be a satisfying and beneficial endeavour. With a little estate planning, you can make significant charitable donations on your death while saving your estate taxes and creating a lasting legacy.
There are many ways you can benefit the charities you support throughout your lifetime. However, there are also many opportunities that allow you to continue to support the charities you believe in, by way of planned gifts. Planned giving is a very powerful and popular way to achieve your philanthropic goals.
Planned gifts provide numerous tax incentives while balancing your financial, personal, family and philanthropic objectives. A planned gift can be as simple as a small legacy in your Will to the charity of your choice, or as complex as setting up a private foundation in your name.
Planned giving provides the opportunity for individuals to make a larger gift than would have been possible during their lifetime, make a difference for the beneficiaries of a beloved charity, and leave an important legacy behind.
Regardless of economic times, the desire people have to support charitable causes does not wane. Planned giving provides the opportunity for clients to set up a long-term strategy for philanthropic pursuits that will remain intact despite economic fluctuations. Why Planned Giving?
Now retired from his position as a senior partner at Basman Smith LLP, Morton Smith Q.C. recalls helping families understand these benefits, and arrange legacy gifts such as a gift in a Will. Morton served over 50 years as a general law practitioner, assisting his clients achieve their business, financial and personal goals. This tradition continues to be the focus of Basman Smith LLP and its lawyers.
"I am a strong believer in legacy giving to charities," says Morton, who always advised clients to consider charitable giving when making their estate plan. "Philanthropy is a goal of most people - both for themselves and as a testament to their family's values. I always recommended that a charitable bequest can have more of an impact when left to one charity, rather than stretching it over several. It also simplifies the administration process for the estate. Imagining the possibilities of what a gift can achieve gives you a good feeling."
Morton is himself a legacy donor and has given an extraordinary 20 years of volunteer service to Mount Sinai Hospital, an academic teaching and research hospital affiliated with the University of Toronto. He knows that his gift and the gifts of others will help the Hospital continue to conduct research with a global impact, attracting more of the world's most talented physicians and health-care professionals. He has already witnessed the impact of planned giving at Mount Sinai, including expansion of the renowned women's and infants' health program, the purchase of advanced equipment and the establishment of research grants for young scientists. Morton has been instrumental in continuing the donor support of his firm Basman Smith LLP.
Although Morton and his family have a long-term tie to the history of Mount Sinai (his 12 grandchildren were born at Mount Sinai), he says that a personal association is not his only reason for including the hospital in his plans.
"Some organizations need stronger financial support than others," says Morton. "Knowing this helped me to make my decision, and it has helped my clients achieve great satisfaction in arranging a charitable gift. As for me, I am rewarded knowing that I'm creating possibilities for future generations."
Everyone has their own reasons for giving. Whether your incentive stems from tax-related benefits, your strong belief in a particular cause, or your personal philanthropic vision, the benefits of planned giving are plentiful:
* Fulfillment - knowing that you are contributing to a cause you believe in, or which holds special significance to you; * Financial - acquiring tax benefits now, and decreasing the amount of tax your estate will be required to pay; * Control - ensuring your wishes are followed, and your charitable legacy continues after your death; * Comfort - ensuring your financial and family affairs are in order prior to your death: * Convenience - by having professionals manage your assets, you can be assured that your assets are protected, without worrying about ongoing management decisions; and * Protection - attaining peace of mind by determining your charitable legacies in advance, instead of postponing or never creating a plan
Types of Gifts Legacies
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, or a percentage of your estate. 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 to the Will. On death, tax benefits from the charitable gift benefit your estate. 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 plan, 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. Designating an RRSP to Charity
You can name a charity as a beneficiary of your RRSP. On your death, the RRSP 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 RRSP. You will also receive the usual tax deduction by contributing to the RRSP throughout your lifetime. RRSPs also offer the flexibility of changing the named beneficiary at any time, without having to change your Will. As RRSPs flow to the beneficiary outside of your estate, these gifts are also safe from actions by creditors, claims against your estate, or Will challenges. Donation of Shares
Another technique that can be used to benefit a charitable organization is the donation of public or private shares.
Shares of public companies that have increased in value since the date of purchase can be donated directly to a charity on death. This results in more favourable tax consequences for your estate than if the shares had been sold, and the cash value of the shares (after tax) donated to the charity. This is because there is no capital gains tax payable on the direct transfer of the shares. This rule only applies to public company shares - not private or Canadian Controlled Private Corporate shares - and the donation must be made to a charitable organization or public foundation, and not to a private foundation.
Shares of private corporations are more difficult to gift, offer less tax incentives to do so, and can create negative consequences for other shareholders and the charity itself. In the case of private shares, it is better to sell the shares of a private corporation and gift the proceeds of sale to the charity.
Before a gift of shares is made, one should discuss the proposed disposition with their lawyer, accountant, and investment advisor to ensure the donation will lead to the intended consequences. Charitable Annuity
Contributing to a charitable annuity is yet another way you can benefit a charitable cause while benefitting yourself and your estate. Some charities sell annuities that provide a fixed lifetime payment to the contributor. This arrangement allows the charity to benefit from a lump sum contribution from you, while you earn income from the annuity throughout your lifetime. You receive a charitable tax deduction for your contribution, and the annuity payments receive preferential tax treatment. Charitable Remainder Trust
With a charitable remainder trust, an asset is managed on your behalf by a trustee, in accordance with the terms of a trust agreement. During your lifetime, the income from the asset is paid to you. On death, the trustee transfers the investment to the charitable beneficiary you have pre-selected. So long as the capital investment cannot be returned to you under the terms of the trust, you will receive a charitable tax receipt at the time the trust is arranged, for the value of the asset transferred to the trust. However, you will enjoy the income generated by the asset throughout your lifetime. Foundations
Individuals or groups of individuals with philanthropic goals may wish to consider the use of foundation to achieve their objectives. A private foundation can be created from the financial resources of one individual, or by pooling the resources of a number of people. The tax incentives are not quite as favourable for private foundations as they are for charitable organizations. However, you control what cause the foundation will benefit. In addition, there are reporting requirements set out by the Canada Revenue Agency and the Public Guardian and Trustee, which must be adhered to. Given the complexity of administering a private foundation, another simplified option is to contribute funds to a Community Foundation or donor advised fund. Next Steps
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 so that a gift can be tailored to your financial and personal situation. Many charitable foundations also have very helpful staff and will work with you and your advisors. If you are considering a planned gift, please give us a call. We would be happy to discuss with you how to incorporate charitable gifts into your estate plan.
Written by Mary Wahbi, L L.B, TEP and Karen Yolevski, L L.B (Toronto)