Leaving an estate to charity
Our last couple of columns provided a few ideas and strategies which individuals should consider prior to making donations. Our recent articles have highlighted how a little planning can often enhance the amount of your intended donation.
Some individuals may be fortunate enough to have more money than they will ever need to live on, while others may not have children and would like to plan where their estate should go. A small number of individuals may simply decide they do not want to leave their entire estate to their children and would like to know some of the options available to them. One option is to make a significant gift to a charity of their choice and create a legacy.
What are the reasons why people make significant charitable donations? A study from fundraising expert Mr. Jerold Panas states five of the main reasons for making significant donations are:
- Belief in charity’s mission and vision
- Community responsibility and civic pride
- Fiscal stability of the charity
- Volunteer leadership
- Staff leadership
Many people may be surprised to see that tax benefit is not high on the list of reasons why individuals make major charitable donations.
Tax incentives may be one reason for individuals to make a major donation but it is rarely the main motivating factor. Events in a person’s life, such as the sale of a business may present an ideal opportunity to make a major gift. Although tax incentives are not the primary motivation for significant gifts, a little tax planning may provide the benefit of increasing the size of the donation.
Other Motivating Factors
Some philanthropic motivations may be based on values, education, illness, religious beliefs or other personal life experiences. In many cases these are the motivating factors for significant gifts. These individuals are often committed to creating a meaningful legacy. An individual’s legacy can be enhanced through strategic gift planning and private foundations.
Strategic Gift Planning
Strategic gift planning may involve working with your investment advisor, accountant, estate lawyer, and estate trustees to develop a comprehensive plan. Strategies discussed in our last two columns are cash donations and gifts of publicly-listed securities. Charitable remainder trusts, charitable gift annuity, charitable insured annuity, charitable life insurance gifts and establishing a private foundation are other options that we will be addressing separately in our next few articles. The remaining portion of this column will specifically focus and discuss charitable bequests.
Leaving property or other assets to someone through a will is known as a bequest. Leaving amounts of cash is known as a legacy – when that someone is a charity it is often referred to as a charitable bequest or legacy. Charitable bequests and legacies are the most common methods of planned giving.
Leaving funds or property through a charitable bequest allows individuals the right to retain the use of the property and other assets while living. If the individual should live longer than anticipated they are more likely to use up a greater portion of their personal capital. A shortened life expectancy may result in the charity receiving more funds. The amount being donated can be treated as a residual component of the estate plan. Charitable bequests and legacies to charities under a will can be applied to produce tax credits, which can then be applied by your executor on your final income tax return and on the year prior to death.
Flexibility is another big advantage to this method of planned giving. By changing their will, individuals have the option to appoint a different charity if circumstances change. Individuals may choose to increase or decrease the amount or to split the planned donation amongst additional charities.
Items to Consider
Professionals: We encourage individuals that are considering a charitable bequest to communicate their intentions with a trust company estate planner, estate lawyer, investment advisor and accountant.
Up to Date – Individuals should ensure their wills are up to date. This should involve checking to see if the beneficiary still has charitable status and continued operations.
Keep it Clear – With charitable bequests it is important to have clear instructions in the will. If instructions are not clear, then the Canada Revenue Agency may view the donation as part the deceased’s estate return rather than the final tax return.
Dependents and Creditors – Surviving dependents and other creditors have the ability to challenge the will.
Public Access – Privacy is not guaranteed as probated wills are considered a public document.
Costs –Structuring charitable bequests and ensuring the legal documents are in place may add costs to an estate plan and should be considered. These may be in addition to probate fees, administration costs (accountant, lawyer and executor) as well as other estate fees.
Other methods of planned giving may have lower administration costs, provide better tax efficiencies and allow the donor to see the benefits while they are alive. Similar to investing, no decision should be made solely for tax purposes. Other methods of donating are much more permanent; once made, the donated amount is no longer accessible. Charitable bequests may be revoked at any time by updating the will. For many individuals leaving a charitable bequest is the best option.
Before implementing any strategy noted in our columns we recommend that individuals consult with their professional advisors (insurance consultant, financial advisor, accountant and estate lawyer).