Including charitable giving in a will can be as much an emotional decision as a practical one. Warm, fuzzy feelings aside, the tax benefits from a donation upon death can significantly reduce – or even eliminate – the tax bill owed by an estate, leaving more of a person’s assets to be distributed as they intended.
But without careful consideration of how a charity is named in a will, what form a gift is given in or how much legal power a will’s executor maintains over a gift, a well-intended donation could result in a big legal fee.
It has become a pressing issue now that the great wealth transfer is under way, with trillions of dollars expected to change hands between the silent generation and baby boomers and their Gen X and millennial heirs. Market researcher Cerulli estimates US$84.4-trillion will be passed down over the next two decades – US$11.9-trillion of it to charities. In Canada, Chartered Professional Accountants estimates $1-trillion will be handed down between now and 2026.
Anyone planning to transfer some of their wealth to a charitable cause, says Catherine Kim, an estates and trusts lawyer with Boughton Law, should ask themselves: What is the purpose of the gift?
Typically, she says, answers include a combination of wanting to give to a good cause and to mitigate some of the taxes people expect their estate will incur upon death, such as capital gains tax.
“A person’s death is a tax-triggering event because you are deemed to have sold all of your assets at the fair market value at death,” she said.
Assets that have increased in value, such as investment portfolios, RRSPs and investment properties, can trigger capital gains tax upon death if there is no surviving spouse to inherit them, Ms. Kim said. For individuals, gains up to $250,000 annually are taxed at a 50-per-cent inclusion rate; anything above that faces a 67-per-cent inclusion rate.
Charitable donation tax credits can help absorb some of the shock from income and capital gains taxes upon death, Ms. Kim said, leaving more in a person’s estate.
However, Michelle Isaak, a partner at DLA Piper Canada LLP, says a tax credit won’t be possible unless the creator of the will is diligent about checking that their charity of choice is registered with the Canada Revenue Agency and correctly named in their will.
To find out if a charity will issue a tax receipt, Ms. Isaak said, the CRA has a searchable list on its website. That’s also where the charity’s proper name and registration number can be found, which is what should appear on the will, she added.
People should also consider giving an executor discretionary power and flexibility to make decisions about charitable gifts, Ms. Kim said. For example, if a charity named in a will no longer exists upon a person’s death, an executor could distribute the donation to the next most fitting cause without having to seek legal help.
“It’s a real gift to the executor to give them a wide range of tools and flexibility, because you just don’t know what the facts are going to be when that will becomes relevant,” she said.
Flexibility can also be key when deciding how much to donate. Often, charitable gifts are included in a will as either a percentage of the estate or a fixed lump sum – both of which have pros and cons.
Ms. Kim said leaving a lump sum is inherently risky because it’s difficult for a person to know what their estate will be worth when they die. It also closes the door for the executor to optimize the gift around taxes and can leave other residual beneficiaries with less – or more – than what was intended.
However, Ms. Isaak said a lump sum can be easier for an executor to deal with when it comes to tax filings because it creates a one-time tax credit, whereas specifying a percentage of the residue of an estate can create a slightly maddening situation of endless tax refunds.
“You end up chasing your tail because you make the donation, you report it on your tax return, you get a refund. Now we have more residue, so then you have to continue to make the donations.”
Whichever form the gift is left in, donors should be aware of changes to the alternative minimum tax – a system that places a minimum level on the percentage of tax a filer must pay, no matter how many deductions or exemptions they claim – which came into effect in 2024, Ms. Kim said. The changes may reduce the tax benefits of donation tax credits and therefore, she said, it’s important for anyone making a tax-driven donation to seek advice on how to optimize their gift.
Naming a charity in a will also means deciding what kind of legal rights it possesses as a beneficiary. For example, if a charity is named as a residual beneficiary, meaning it inherits what’s left in the estate after the payment of all debts and liabilities, it has the right to scrutinize and review the estate’s financial information and management.
Depending on the charity, Ms. Kim said, this can create challenges for an executor.
“You might get a charity that is going to go through records with a fine tooth comb.”
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