CHARITABLE BEQUESTS: AN OVERVIEW
A bequest (also known as a gift by will or a testamentary
gift) is a revocable gift made by Will to a charitable beneficiary.
There are four basic types of bequests:
1. specific bequest (either a specific amount or a specific piece
of property which is usually paid out before any residual
gifts);
2. residual bequest (a share or percentage of the residue of
estate);
3. contingent bequest (a “disaster clause” bequest that names
an alternate beneficiary in case the terms of the original
bequest cannot be met); or
4. bequest subject to a trust (Will establishes a testamentary
trust that is funded at death; typically provides lifetime
income to one or more named beneficiaries and a future
gift to one or more charities).
Since a bequest is revocable, it can be
amended or revoked at any time by
the donor.
Tax Treatment
At death, there is a “deemed disposition” of all capital property
owned. This means that for tax purposes property is treated
as if it were disposed immediately before death. There may
be capital gains or losses triggered by the deemed disposition.
Capital gains taxes owing are payable on the final lifetime
income tax return and losses can be used to offset gains. Any
capital gains or losses that occur after death are recognized
on the estate tax return.
Under the Income Tax Act, an individual who makes a
gift by Will to a registered charity or other qualified donee
(specific organizations that can also issue tax receipts) is
deemed to have made a gift immediately before death. The
gift generates a non-refundable tax credit that can be claimed
against tax owing. Depending upon how it is structured, a
bequest subject to a trust may not generate any tax savings
on the final lifetime return.
A gift at death can be claimed against up to 100% of the
individual’s net income on the final two lifetime tax returns.
If the bequest is too large to claim on the final return, the
surplus can be carried back to the previous tax year. The 100%
contribution limit can eliminate tax on the final two lifetime
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returns if the charitable bequest is large enough.
If you have allocated a significant portion of your estate to
charity in your will (rule of thumb is 25%), you may have a
planning opportunity. If the bequest is too large to be claimed
on the final two lifetime returns, a portion of the eligible tax
credit will be lost.
To utilize the tax credit, it may be
prudent to give a gift during life.
Splitting a large bequest into a
lifetime gift and a bequest can help
significantly increase total tax savings.
When properly planned, you will have the satisfaction of
giving during life without any change in your lifestyle.
Examples of Charitable Bequests
• Specific Bequest
Mr. & Mrs. Griffin name a specific bequest of $50,000 in
their Will for their favourite charity. When the second spouse
dies, the bequest is paid out at the beginning of the estate
administration process.
• Residual Bequest for Legacy Fund
Steven and Wendy Jones name the Jones Family Fund at a
public foundation as the residual beneficiary of Steven’s Will.
The Jones Family Fund is established at the same time as their
Wills are executed. The Fund is established to support charities
or causes of interest to Mr. & Mrs. Jones as chosen by their two
adult children. They have the option of partially funding the
Fund during life for philanthropic and tax planning reasons.
• Charitable Testamentary Trust
Chen and Betty Tsi have an adult daughter with a severe
physical disability. Their Wills create a testamentary trust
to provide support to the daughter for the balance of her
life. When the daughter dies, the remaining capital in the
trust will pay out a charity that provides community based
nursing services.
• Testamentary Private Foundation
Andrea Wilson establishes a testamentary trust in her Will
that will exclusively support charities of her choice. When she
dies the trust will be registered with Canada Revenue Agency
as a private foundation by her trustees in her memory. The
objectives and terms of the private foundation are incorporated
into the Will.•
This article has been adapted by BenefAction with permission from the
author, James Dunne, Wealth Advisor at ScotiaMcLeod in Toronto.
BenefAction enables individuals, financial advisors and institutions to make
a positive impact through planned giving. https://benefaction.ca
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