The wrong words in a document such as a will, or an estate administration misunderstanding in today’s legislative environment could cause problems for charities. Although I was one of the early members of the planned giving “allied professionals” network in the 1990’s and have spoken at many conferences and workshops about planned giving since then, it has not been until this year when changes to the Income Tax Act and other legislation have made me realize that Planned Giving is now an expert area that needs special attention. Recall the old adage “it’s not what you don’t know that’s important it’s what you don’t know that you don’t know”.
As 2014 was coming to a close, there were blogs, newsletter articles and twitter comments about changes to the Income Tax Act that affect the estate administration of gifts to charities. As 2015 begins, charities in provinces such as Alberta should be aware that the legislature has attempted to bring the estate administration practices and procedures into the modern era in a way that might require charities to become more vigilant when dealing with gifts by will. Each of these changes could be the subject of a workshop or thorough article but even alerting charities to these issues is a good start.
Three areas worth highlighting that charities should reacquaint themselves with are as follows:
1. Planned gifts made by will.
The new rules use a term called “graduated rate estate”. A graduated rate estate will enjoy tax-free capital gains for gifts of publicly traded securities. Fortunately the new rules also clarify that the gift is deemed to be made either by the will or the estate at the time that the gift is actually given to the charity, not as of the date of death of the donor testator. This will make it more certain for charities that have to issue the tax receipts. As usual the devil will be in the details and how the sections of the Income Tax Act apply in any situation. There may still be issues to resolve if the estate has to make the gift after it loses its graduated rate estate status, due to lengthy litigation for example.
The 2014 Federal Budget led to proposed changes expected to take effect for deaths on or after January 1, 2016. There will be changes to the use of donation tax credits for gifts made by will, one of the most common kinds of planned gifts. It was sometimes frustrating that a gift made by will did not lead to a useful donation tax credit because the rule was that a donation that was made by will could only be used as a tax credit for the actual year of death of the donor or the prior taxation year. Now, it is anticipated that new rules that will take effect January 1st, 2016 as a result of the 2014 budget will allow this donation tax credit to be used as before but also to be carried back to any prior taxation year of the donor, or carried forward by the estate within certain parameters.
2. Charities who are residual beneficiaries of spousal trusts.
Amendments to the Income Tax Act also propose that after January 1, 2016 there will be changes to how certain trusts are treated. It is often the case that a charity is one of the remainder beneficiaries of a spousal trust for example. After the spouse is finished with the capital in the trust (i.e. the spouse dies) then anything remaining will go to the remainder beneficiaries. The new twist introduced by the new rules is that now the income and any capital gains that are triggered in the trust as a result of the spouse’s death will be borne by the spouse’s estate and not necessarily by the trust. There are very specific rules about how this can be changed by tax elections that could be filed. The effect of this could be to put a charity in the position where it is making elections and effecting not only itself because of an anticipated gift but also the tax position of others including the deceased donor’s deceased spouse’s estate. This is something that charities have not usually had to deal with and may cause some confusion in the first few years of implementation if these rules are not changed again.
3. Changes to estate administration legislation.
In summary, charities who expect to receive gifts may have to become experts and perhaps very diplomatic in dealing with matters that relate to the legal issues surrounding the drafting of wills and the administration of estates. Some of the best practices that charities could adopt as they anticipate receiving these gifts in the great transfer of wealth between the generations which is now underway are as follows:
As an aside, in Alberta the Wills and Succession Act came into force in 2012 and even that new legislation which was intended to modernize wills themselves in Alberta contained a few changes that charities should be aware of by now. Those changes relating to the factors the Court can consider in the interpretation of a will and translation of wills may also have impact on gifts that were given to charities in wills.
As provincial governments across the country change their estate administration legislation to modernize the process, charities need to be aware of these changes so they can keep up and identify issues that might be affecting any gifts given to them in a will. For example, soon provisions in Alberta will be in effect (anticipated in Spring 2015) that those charities hoping to receive anything under a will of an Albertan should be aware of. Not only does this legislation change the term Executor to Personal Representative, it has very specific guidance in its provisions that sets out the core tasks of a person administering an estate. When this legislation comes in force it will apply to any existing administrations in progress or new ones that result from a death. Perhaps for charities the most important section of this legislation is the one that provides that not all estates that will be administered by a personal representative will need to obtain a grant from the Court. In other words there will be estates that are being administered by Personal Representatives not formally appointed as such by the Court but simply taking on the duty of personal representative because they are named in some document. Many of these documents could be giving a gift to a charity by a well-intentioned donor testator. The charity needs to be aware of the gift in the first place and but also be aware of the duties of the personal representative vis a vis the beneficiary charity and follow the administration of the estate carefully. Many of these personal representatives will not even retain legal counsel to help them so the monitoring becomes even more important.
- Key personnel in the organization that deal with donors and planned gifts should join organizations such as the Canadian Association of Gift Planners and make sure that they keep up to date with the most recent laws, practices and procedures relating to dealing with donors in charitable gift situations.
- Charities who are dealing with planned gifts should get professional advice and encourage all donors who are planning gifts to also get professional advice, especially under documents such as wills that may already have been drafted and signed long ago.
- Charities should be aware of their duties to maximize the funds available to their cause and have to be very vigilant that they protect all they are entitled to under any estate. This may mean getting advice and documenting advice if a charity is going to sign any elections or releases or make sure that you have a discussion at the Board of Directors level as these issues are encountered.
Overall, planned giving has been growing and due to the transfer of wealth between generations as referred to above it will grow even more in the years to come. What will be important is that charities act professionally and do their very best to receive gifts and to cause a very stress-free experience not only for the donors who are creating these gifts, but also for the boards of their charities who will ultimately be responsible to ”do the right thing”. This will involve the necessity of planned giving expertise.