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The Drafting of Wills -Part 2 - The Specifics of Charitable Giving - Hull on Estate and Succession Planning #156

By Hull & Hull LLP

 

 Listen to The Drafting of Wills -Part 2 - The Specifics of Charitable Giving

This week on Hull on Estates and Succession Planning, Ian Hull and Jordan Atin continue their discussion on the drafting of wills and take a closer look at the specifics of charitable giving.

If you have any comments, send us an email at hullandhull@gmail.com or leave a comment on our blog.

The Drafting of Wills - Part 2 - The Specifics of Charitable Giving - Hull on Estate and Succession Planning #156

 

Posted on March 18^th, 2009 by Hull & Hull LLP

 

Welcome to Hull on Estates and Succession Planning, a series of podcasts hosted by Ian Hull and Suzana Popovic-Montag.  The podcast you're listening to will provide information and insights into estate planning in Canada.  From the offices of Hull & Hull in Toronto, here are Ian and Suzana.

 

Ian Hull:    Hi and welcome to Hull on Estate and Succession Planning.  We're on our mini-series, Part 2, with Jordan Atin, and I'm Ian Hull.

 

Well Jordan, last week the podcast that we delved into was sort of talking about gifting and then specifically about charitable gifting.

 

Jordan Atin:   Right.

 

Ian Hull:   So today, let's spend some time talking about some of the specifics of charitable giving.

 

Jordan Atin:   Sure.

 

Ian Hull:    And both Jordan and I, with great pride, can say that we are not tax lawyers and we don't pretend to give any tax advice ever in our day and certainly not today.  But the tax element of charitable giving, I think, is worth talking about and some of the concepts.  It seems to me its such a personal decision.  It's also very personal that people, we tell our clients to go see your advisor and see your own tax advisor,

 

Jordan Atin:   Right.

 

Ian Hull:    Because you're personal circumstances will drive what charitable style or effect of the charitable giving you can use.  So if we step back and we talk about charitable giving generally, what are the two sort of approaches to charitable giving in a Will and typically set out?

 

Jordan Atin:   Well one classic way is to leave an amount, for example, a specific amount.  I leave $100,000 to X charity for the general purposes of the charity.  For example, maybe I just like this charity and I want to leave a specific amount, I trust them to do what they wish with it.  So that's one way of doing it.  And there's all kinds of variations on that.  You can leave a percentage of your estate to a charity as well rather than a fixed amount.  Maybe you want to leave a quarter or some percentage.  So that's two ways of at least giving some amount to charity.  The other way, and like you say there are a myriad of different ways, but another way is to sort of control what those funds are used for.  And so you can direct, and they're called donor-advised funds.  So you as the donor are advising the charity as far as what purposes you are to use that for.  I only want it for research; I only want it if it's going to a hospital for benefit of care; those sorts of things.

 

Ian Hull:    Now let's step back then.  And if we're looking at the charitable giving, the process, one of the things that I struggle with when we're on the contentious side is that battles over a charitable gift can be sort of subsumed by the fact that when someone was alive, they over-fixated on the tax benefit and they planned for the tax as opposed to planning for the gift.

 

Jordan Atin:   Right.

 

Ian Hull:    Do you see that sort of thing, and do you talk to your clients about that?

 

Jordan Atin:   Yeah, for sure.  I mean people are, to some degree, obsessed with taxation and minimizing it.  That's fine.  That is, in my view as a lawyer, sort of the least important.  If you can do everything that you want to do and then save tax, that's great.  If the tax is driving where your estate is going, I think you're probably having the tail wag the dog.

 

Ian Hull:    And speaking of that, what's a good classic example of the tail wagging the dog is, of course, probate tax.

 

Jordan Atin:   Right.  So what people will do is put things in joint ownership, for example, when really with one kid.  And really the intention is that they're to share that asset among all the kids but just for tax planning, they're going to put everything joint with one kid. And sure enough when the parent dies and the one kid says well Mom really meant it all to go to me, there's a dispute now.  And so that really didn't accomplish what the intention was.

 

Ian Hull:    Alright.  So let's take a moment and talk a little bit about the specifics of the tax concepts.  And the tax concepts are, of course, that when you give gifts of property, either on your death or if you give it during your lifetime, depending on the circumstances, there's this whole…I mean the one tax in Canada that we're cursed with, so to speak, is the deemed disposition tax.  When something is disposed of, there's a tax on the capital gain, the growth in whatever that is.  An easy example would be shares.  The classic example, the demutualized shares that came out of the insurance industry a few years ago.  They were all issues to people who owned the policies but they're issued at zero cost base.

 

Jordan Atin:   Right.

 

Ian Hull:    So eventually when people sell those shares, there's going to be a big tax hit in there because they all came out and popped up in the $20 range and so forth and went up and down from there.

 

Jordan Atin:   And basically if you're just trying to estimate that, you'd basically say if I bought it for zero and its X dollars now, the tax that you're actually going to pay on that is a quarter of X, that's the basic way of thinking of it.

 

Ian Hull:    So one of the tricks, if our goal is to give to our family or at a minimum give to charity, one of the great tools that the government of Canada has allowed us to do is to donate shares.

 

Jordan Atin:   Right.

 

Ian Hull:    And to specifically donate shares to a charity, whether you do it during your lifetime or at death. But if we're going to, for today's podcast, focus on death, when that deemed disposition occurs and that donation of shares goes specifically and expressly to a charity, there can be a tremendous tax advantage to your tax burden on your death.

 

Jordan Atin:   Right, exactly. 

 

Ian Hull:    And you can help either way at that 25% hit that is lurking.

 

Jordan Atin:   Right.

 

Ian Hull:    On the shares.

 

Jordan Atin:   And obviously we're talking about sort of death planning.  I mean that's the one day when you know you're going to sell those shares because that's what our tax code says is that on the day of death, you're deemed to have sold everything.  So you know there's going to be a hit there.  And that's why sometimes people make the charitable donation then because that's when they're going to trigger the tax.

 

Ian Hull:    Right.  And we have the other options, of course, if we're going to want to give to charity.  And it's a nice thing because you want to enhance your estate as best you can, so the more money that you can spread around and the less tax you pay, actually if you talk to good financial advisors, you can net yourself out and do very well to save tax and enhance your family and enhance the charity.

 

Jordan Atin:   You basically are creating more money by giving to charity and therefore reducing the amount you're going…the only people who lose is the government and the charities take that extra money.  So yeah, if structured properly, there's a great savings there.

 

Ian Hull:    So another idea is that you could also consider if you wanted to lock down a specific amount, for example, is to designate a charity on your RRSP as the recipient on your death, or on your RIF.  So you know the fixed amount or thereabouts that you're going to be giving and you end up creating another tremendous tax savings on the date of death when the capital gains is triggered because as we know, on RIFs and RRSPS, there's a very big inherent tax payable on that amount.

 

Jordan Atin:   Yeah, we were talking about the 25% rule on capital property.  I mean it's even worse; it's double that on a RIF or an RRSP because you basically, 100% of the value of that RRSP or RIF goes into income and you're going to be paying 50% tax likely if it's a sizable RIF.  So tax is 50% of the RIF.  So that's how important charities, you know, that's the benefit of appointing charities as beneficiaries of that because the tax is so low.

 

Ian Hull:    So significant. 

 

Jordan Atin:   Yeah.

 

Ian Hull:    So that's another tool.  I mean, really what we wanted to do today was just take some of these tools and illustrate the need to consider these options if you want to balance the gifting to the family and gifting to family and friends or whoever and to charities.  Another idea is of course if you have share options and so forth because if you cash in a share option during your lifetime, it's thrown into your income as income for that year.

 

Jordan Atin:   Right.

 

Ian Hull:    And another option is allow for that possibly to be dealt with on death to a charity.

 

Jordan Atin:   Right, for sure.

 

Ian Hull:    So those are the three just simple ideas that come about.

 

Jordan Atin:   Can I mention one more?

 

Ian Hull:    Oh I encourage it.

 

Jordan Atin:   I mean, people use life insurance as well and designating charities of life insurance policies which is another…you know when that monies coming in and there's some complicated tax benefits to it but, yeah, that's another one.

 

Ian Hull:  That's great. So we've got four good illustrations. 

 

So we've now enhanced the size of our estate, we've told our family about the charitable gifting that we're going to do.

 

Jordan Atin:  Right.

 

Ian Hull:  So there's not going to be a fight.  And we've left a great legacy because we feel we owe that to our next generations and so forth. So again, thank you very much for joining me today.

 

Jordan Atin:  It's been my great pleasure, thanks.

 

Ian Hull:  Well, thank you.  I remind everyone please to go to familywar.com to get Jordan's book.  He explains these concepts in much more detail.  And I appreciate you taking your time today.  Thanks a lot.

 

Jordan Atin:  Thanks Ian.

 

You have been listening to Hull on Estates and Succession Planning by Ian Hull and Suzana Popovic-Montag.  The podcast that you have been listening to has been provided as an information service.  It is a summary of current issues in estates and estate planning.  It is not legal advice and you are reminded to always speak with a legal professional regarding your specific circumstance.

 

To listen to other Hull & Hull podcasts, or leave any questions or comments, please visit our website at hullestatemediation.com.

 

 

 

Full post as published by Toronto Estate Law Blog on March 18, 2009 (boomark / email).