Amy J. Cornew-Fingas, Associate Lawyer
Thinking about, let alone talking about one’s death is never an enjoyable or easy subject which is why it is understandable why people put it off for as long as possible. However, death is inevitable (unless there are huge scientific developments in our future), and we should be more open to speaking about it and more importantly planning for it. In fact, I have found that at the end of the whole process, once the documents are all signed, clients find a certain amount of satisfaction that comes from dealing with this distasteful task and tying up loose ends.
Estate Planning, what is it?
So, what is estate planning? The term is bandied about a great deal but what does it actually mean? Simply put it is the process of anticipating and planning for how your estate (your earthly possessions) are managed and disposed of if and/or when you become incapable or die. Estate planning gives you the opportunity to plan for a future that you can influence even when you will no longer be around. It is a chance to show appreciation and take care of loved ones, to live out your life values after you are gone and continue to have an impact on the things you cared about during your life. It is your final say.
Charitable giving: paying forward to a future you care about.
One way of doing this is to leave a gift to a charity of your choice in your will. Many charities rely on legacy gifts to keep going and doing the important work that they do. It is all very well to do charitable work while we are alive, but the charities need to be able to carry on after we are gone. Legacy gifts make this possible. Legacy gifts have tax benefits and there are many ways to leave a gift to a charity and still pass resources onto family and friends.
There are many different types are legacy gifts that suit different needs:
- Gifts of Publicly Traded Securities;
- Charitable Gift Annuities;
- Gifts of Life Insurance;
- Life Beneficiary Gifts;
- Charitable Remainder Trusts; and
- Gifts of Residual Interests.
A charitable bequest is a direction in your will that leaves estate assets to a charity of your choice. A bequest can include cash, securities, and tangible personal property. There are four different types of bequests:
- Percentage: the charity receives a percentage of your entire estate;
- Specific: the charity receives a fixed amount of money or a specific piece of property (for example: real estate, securities, valuable jewellery or art, etc.)
- Residual: the charity receives all or a portion of whatever remains in your estate after all the debts, expenses and other bequests have been paid; and
- Contingent: this is a gift that is dependent on something occurring first (for example all the relatives are predeceased, and there is no one left alive to accept the estate then it would pass to the charity.
The benefits of this are:
- It is tax efficient because it reduces the tax payable on your final tax return, up to 100% of your income. If the bequest exceeds 100% of your net income, the excess may be carried back to the previous tax year or forwarded as part of a Graduated Rate Estate plan.
- It is also strategic because (if done properly) it can result in your loved ones and your charity of choice receiving more because less tax needs to be paid.
Gifts of Publicly Traded Securities
When you sell publicly traded securities, you are taxed on 50% of the capital gains. However, if you transfer the securities directly to a charity as a gift-in-kind, you pay no capital gains and receive a donations tax receipt for their full market value. By gifting shares, bonds or mutual funds that have appreciated to a charity of your choice you are able to give more in a way that costs you less.
If you leave direction in your will to use any appreciated securities in your estate to make a gift to a charity, you save taxes and preserve capital for your other beneficiaries.
The benefits are:
- Tax efficient: your estate receives a tax receipt for the full fair market value of your gift and avoids capital gains tax on its appreciated value.
- Cost-effective: for the same cost to your estate, you can make a larger gift to a charity, and you will receive more tax credits. It costs your estate less, to give more!
Charitable Gift Annuities
A Charitable Gift Annuity is a way for people over sixty years old to leave a gift to a charity while also receiving a steady income during their lifetime. You can have a single annuity for yourself or a joint annuity which is shared with spouses, partners, siblings, etc. The majority of the income is tax exempt, depending on the size of the gift and your age at the time that you acquire the annuity. You also receive a one-time charitable tax receipt for at least 20% of the total annuity (the percentage increases the older you are when you acquire the annuity).
The benefits are:
- Guaranteed income: the annuity rate and income are guaranteed for life.
- Tax effective: receive an immediate charitable tax receipt when you make the gift and a portion or all of the income is tax-exempt.
- Peace of mind since there is no need to worry about investment risk and/or balance your portfolio.
There are many options for charitable gift annuities available in keeping with your values.
Gifts of Life Insurance
Many people may not have considered this but giving the gift of a life insurance policy is a way of giving far more that you might think possible. You can make a gift of an existing policy or a new policy. There are three ways of doing this:
- Transfer the ownership of an existing policy. This way you receive an immediate tax receipt for the policy’s cash surrender value and if you continue to pay annual premiums after transferring the policy, the charity will issue regular tax receipts for the premiums paid. You can use the receipt for up to 75% of your net income and/or carry forward any unused portion for up to five years.
- Acquire a new policy with the charity of your choice as the owner and beneficiary. You will receive a donations tax receipt for every dollar paid in annual premiums and the charity will receive the value of the policy when you die. For relatively small annual payments you can leave a substantial gift.
- Make the charity the beneficiary. If you would like your estate to benefit from tax relief, you can make the charity of your choice a beneficiary of your life insurance (see more below).
The benefits are:
- It is simple since policies are easily obtained through an insurance broker.
- You are able to give a substantial gift while making relatively small premium payments.
- Tax efficient: tax credits from your premiums can offset the cost of the premiums and your estate avoids probate and other fees because the death benefits are not considered part of your estate.
Life Beneficiary Gifts
By naming a charity of your choice as the beneficiary of your Life Insurance Plan, Registered Retirement Savings Plan (RRSP), Registered Retirement Income Fund (RRIF), or Tax-Free Savings Account (TFSA), you can provide a substantial future gift, while reducing the taxes payable by your estate.
The benefits are:
- It is simple: all you need to do is ask your financial institution to change the beneficiary designation to the full legal name and address of the charity of your choice.
- It is flexible: the designation may be changed if your financial circumstances change.
- It is tax efficient: your estate receives the tax receipt for the value of the gift, but doesn’t have to pay probate, legal or executor fees because it is considered outside of your estate.
- It is also more private since it falls outside of the estate.
Charitable Remainder Trusts
The creation of a trust allows a donor to leave a gift to a charity and provide for a dependant child or spouse. When the trust terminates (upon your death or the death of other beneficiaries of the trust) the trustee gives the remaining assets to the charity of your choice.
The benefits are:
- Tax efficient: it may be possible to eliminate capital gains tax at the time appreciated assets are contributed to a trust and a charitable tax receipt is issued when transferring assets to a trust that names a charity as the capital beneficiary.
- Income: the income beneficiary will receive regular income form the trust for life or for the specified number of years.
- Outside your estate: assets are held in the trust are not subject to probate fees and are less susceptible to challenge than a will.
- Private: a trust agreement can be kept private.
Gifts of Residual Interest
Did you know that you can enjoy the tax benefits associated with donating real estate to a charity while retaining the use of the property for the rest of your life, or an agreed term? By giving all (or a portion) of your house or cottage to a charity now, you can receive a charitable tax receipt for the current appraised value and continue to live on the property.
The benefits are:
- Tax efficient: receive your tax receipt now for the present value of the property.
- Control: retain the use of your property for life.
- Outside of your estate: it eliminates probate, legal and executor fees and cannot be contested by heirs.
- Private: your gift is not a matter of public record.
Having your final say.
As you can see, with a little creativity you can share your estate with your loved ones, save some taxes and make a real difference to a charity and/or cause that you believe in. If making life changing gifts to a charitable cause isn’t a great way of making the unpalatable task of confronting your inevitable death a positive and uplifting act, then I don’t know what is.
If you would like more information or assistance with this type of issue, please reach out to Amy J. Cornew-Fingas or contact Lister Beaupré LLP directly by phone at 613-234-2500 or by email at email@example.com.
Amy J. Cornew-Fingas