The 2015 Canadian federal budget contained good news for the gift planning community. Much has been written about the anticipated results of the exemption from the capital gain tax when someone wants to donate their private company shares or real-estate. Although we can surmise from the budget documents how the capital gain exemption will be available while a donor is still alive, we do not know how it could work if the donation takes place at death or through someone’s estate. The language in the budget uses words like “cash proceeds” and “a purchaser that is dealing at arm’s length”. We are waiting for the notice of ways and means motion which will contain the legislation to help us better understand this potential planning opportunity or will rewriting requirement to make this work upon death. No doubt this will be delivered by tweet, email, RSS feeds or something like it on the internet at the end of a hot week in the summer –probably before a long weekend.
In any event, while we are waiting for this legislation, it does seem that there has been an increase in the number of presentations and articles written on the process of making gifts by way of estate and how they are and will be effected by the new graduated rate estate rules, to take effect in 2016, that were contained in the previous 2014 budget. There has been a focus in the estate planning bar on potential issues that could arise in the 36 month period of this graduated rate estate. Perhaps the government might be convinced to expand the 36 month period to allow for estate litigation to be settled so that the gift can be distributed from the estate in time to achieve the tax benefits that the Testator no doubt intended.
This may cause one to wonder: Where does this estate litigation come from and what is the fear? After having listened to a number of presentations recently about protecting lawyers and other advisors who deal with the elderly trying to transfer their assets to who they want to (which may include a charity), and then seeing litigation result after the person’s death, I can see the parallels for the charities themselves who are anticipating these kinds of gifts from their donors. Charities should also take a step back and look at what they can do to avoid litigation. Charities who anticipate estate gifts from elderly donors planning to give most of their estate to charity need to be very careful how they handle these kinds of donors.
Lawyers know about the perils of, and the need to be aware of, protecting elderly individuals as they plan to deal with their estate – whether giving it to the next generation, or to the charity of their choice (often at the expense of the next generation). In the latter case charities also need to be more proactive when helping their elderly donors make these gifts. If they do not, and litigation ensues, charities potentially may lose these gifts just when they are expecting the money to roll in. As charities work to paper these gifts, there are a few basic things they can do to avoid conflicts and the very real possibility that they won’t get anything. If anyone wins when there is a will and a fight, it is the legal team that is defending those who have the most to win.
A recent discussion on this matter referred me to the practice of the Law Society of the United Kingdom that has a publishing company that publishes such guidance for lawyers as the Elderly Client Handbook and the Mental Capacity: A guide to the new law. More interesting though is the practice note issued by the law society of the UK to help lawyers make their clients gifts of assets properly. This practice note covers things like making sure the lawyers know how to assess who their client is, how they take on new clients, how they deal with conflict of interest, and the file retention rules.1
The document gives point by point practical suggestions for looking after the client who is making a gift and setting the scene for the very best result. It is best to ascertain what the client is seeking to achieve, who they wish to give the gift to and what exact types of assets are involved. The client should be able to give enough information to have the lawyer evaluate instructions, clarify the client’s actual circumstances, and make sure they actually own the asset they want to gift, and most importantly, make sure the client has the mental capacity to make the gift. There have been court cases about mental capacity, and no doubt there will be many more as our aging population makes testamentary decisions, creating more documents as they age. The most important thing from a charities point of view is to consider that there may be such litigation in any gift that is given to the charity upon the donor’s death. Keeping a positive end result in mind, ie: that the charity wants to receive the gift without any expensive litigation, there are a few thing that the charity gift planning officer or any other personnel dealing with such a donor should do.
Consider the following:
1. Protect your charity.
As you are beginning to deal with any donor that may be leaving you a large gift, think about all of the steps you should take to avoid litigation and begin to take them as soon as possible. Have a process that must be followed.
2. Paper everything.
Make sure that you keep judicious notes on any communication you have with the donor because there is a very good chance that those notes could be the subject of a case in the courts. In the case of Kaye et al. v. Chapman et al.,(2000 BCSC 1195), the notes of the officers from the charities were thoroughly examined and they had to give evidence at trial. Preparation for these kinds of contingencies is key in any donor contact.
3. Independent legal advice for all
This has been said over and over again to charities as they deal with donors, but now it may become very important as more donors think that they want to donate their private company shares, their public company shares and all other real estate that they own to the very dear charity that they have considered in their will as a beneficiary. As donors get older and acquire more assets but do not necessarily become more sophisticated, this last piece of advice will remain the most important. Let the lawyers who have been trained (and are insured) deal with these issues properly so that the charities themselves will not find themselves in court to defend what may be the biggest gift that they will ever (or never) receive.
If it helps anyone, the UK Law Society’s Private Client Section and the Institute of Legacy Management publish an excellent practical book, Charities as Beneficiaries, 3rd edition, given to all members of the Law Society’s Private Client Section.2 This is to help lawyers help the generous people in the UK who leave almost £2 billion every year to charities in their wills. Charities in Canada could be so lucky.