An Introduction to Estate Planning – Part 4
I read about a well-off senior couple who had four children. They decided to “adopt a fifth child” for estate planning purposes. This meant that, in their will, instead of distributing their assets four ways equally among their children, they added charitable giving as their fifth child and split their assets five ways. Charitable giving was a regular part of their budgeting throughout their lives and they wanted that behaviour to carry on “beyond the grave,” so to speak.
We may or may not choose to make charitable donations in this particular manner, but you may find yourself wanting to leave a portion of your estate to a cause that is important to you. Examples that come to mind include foundations that support research into particular diseases, hospitals, universities and colleges, relief and development organizations, religious organizations, and nature conservancies to name a few.
Beyond the sense of leaving a legacy for a future generation, including a charitable component in your estate plan can also be financially efficient.
A charitable gift in your will, also known as a bequest, may result in significant tax savings. You can allocated the donation between your final tax return, your tax return for the year before death, the estate’s tax return for the year that the executor made the donation, or potentially a previous return of the estate. It is also possible for the estate to claim unused donation tax credits for up to five years after the donation is made. All donations, though, must be made within 60 months (5 years) of death.
Imagine an older couple with four adult children. When they die, they will leave an estate with $500,000 of which $100,000 is taxable income. An illustration of how that situation might work out with or without a bequest is provided by the donor-advised charitable foundation, Abundance Canada:
You can see that, in this case, there is a reduction in the amount available to each child of $12,500 for a total of $50,000. However, the charity now receives $100,000 alongside each of the children, and none of the estate is lost to taxes.
Each estate’s tax situation is unique, of course, so it would be wise to consult with a qualified expert in taxation and/or gift planning. You should also note that the charitable donations limit in the year of death and the immediately preceding year is 100% of the deceased’s net income. If the donations are claimed in the estate’s tax returns, the donations will be limited to 75% of the net income of the estate for federal tax purposes.
Donating Life Insurance
You can name a charity as the beneficiary of your life insurance policy and the death benefit – the amount paid out – can be claimed as a charitable donation in the same manner as donations made in a will. The additional benefit here is that by using insurance, the proceeds flow directly to the charity and avoid being counted in the estate for probate purposes.
A note about British Columbia
In the autumn of 2019, the British Columbia Financial Services Authority issued a determination that gifts of life insurance violated Section 152 of the province’s Insurance Act with respect to “trafficking” in insurance policies, which effectively ended the common practice of the charitable donation of life insurance policies in the province. In May of 2020, a new Information Bulletin was published which sought to clarify this issue and allow for the resumption of charitable donations of life insurance. However, some of the bulletin’s wording confuses as much as it clarifies, so for my readers in BC, you may want to hold off on any arrangements to donate a life insurance policy for the time being.
Donating a Registered Account
Similar to a donation of life insurance, payments from a registered account to a designated beneficiary pass outside the will, which can reduce probate fees. The donation receipt from the charity can be used to offset taxes owing by the deceased or the estate of the deceased. You should note, however, that payments to a beneficiary from a Registered Retirement Savings Plan (RRSP) or Registered Retirement Income Fund (RRIF), unless made to a surviving spouse or a dependent child or grandchild, are generally taxable. However, a donation from a Tax-Free Savings Account (TFSA) would not be taxable.
Donating Publicly Traded Securities
If you have investment assets that have appreciated substantially over time and are held in a non-registered account, you may wish to consider donating them to a charity in your will. The capital gain that would otherwise be subject to tax will be eliminated and your estate will receive a charitable receipt for the fair market value of the donated securities, reducing final taxes.
In my next post in the Estate Planning series, I will discuss the role of the executor/estate trustee.
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Disclaimer: This blog post is intended for general information and discussion purposes only. It should not be relied upon for investment, insurance, accounting or legal decisions.