A Charity as Beneficiary of the Estate – Part 1

Sara Neely, LLB, CRFE, is the Director of Philanthropic Services at the Victoria Foundation. This is part one of two that appeared in The Scrivener, the quarterly publication of the Society of Notaries Public of British Columbia. Please contact Sara with any questions or comments about this article by email or by phoning our office 250.381.5532.

Eighty percent of Canadians will support a charity during their lifetime, yet only 8 percent have included a gift to a charity in their Will.

What is startling is that 5 times more people would consider making a gift in their Will if their advisor discussed the options with them.

In the Fall 2010 issue of The Scrivener, I shared thoughts about asking the philanthropic question —  “Through my volunteer and financial support, what impact do I wish to have in my community?” — with regard to planning financial and estate matters.

This article — presented in two parts — is about the next phase of the relationship: The role of the charity as the beneficiary of the estate.

Rights and Obligations

The rights of the charitable beneficiary are common to all beneficiaries under a Will. They include the right:

• to receive a copy of the Will,
• to receive notice of who is applying for probate, and
• to be apprised of the progress of the administration of the Will.

Where the charity is a residual beneficiary, it has the right to receive an accounting from the executor, to ask questions, and to proceed to a hearing in which the court reviews the accounts (called a passing of accounts) to resolve any disputes, if necessary. The charity will generally ask up front for the disclosure statement that describes the assets, liabilities, and distribution plan in the Will. While that document is provided when the executor’s accounting is presented later in the administration, for budget and planning purposes charities often want to confirm their entitlement to the gift and estimate their share. Where the charity is receiving a specific dollar amount, it will receive only the copy of the Will and notice and will not otherwise be entitled to review the executor’s accounting.

As the steward of public funds, the charity has both fiduciary and moral obligations to the donor, the charity’s supporters, and the people who ultimately rely on the charity’s services. They include safeguarding the charity’s interest in the estate and using the gift as intended by the donor. The charity will monitor the accounting to ensure the gift is not diminished due to unsubstantiated executor, accounting, or legal expenses.

The charity must conduct itself in a reasonable and fair-minded manner throughout the administration of the estate. Where the donor was known to the charity during the donor’s lifetime, the charity will also be guided by that history in ensuring the donor’s wishes are met.

Gifts

Charities can receive cash legacies, bequests of real or personal property, securities, interests in testamentary trusts, remainder interests in life estates, and all or part of the residue of the estate. Many of those gifts are capable of generating a tax credit to the benefit of the individual’s final return, assuming they are, by definition, “gifts by Will.”

Subsection 118.1(5) of the Income Tax Act provides that when an individual makes a gift by his or her Will, the gift is deemed to have been made by the individual immediately prior to death.

It is important to distinguish between offsetting the tax liability of the deceased and the deceased’s estate, which is a separate taxable entity.

• If the gift is a “gift by Will, then 100 percent of the tax payable in the year of death and in the year preceding death potentially can be eliminated. In addition, any carry-forwards of unused charitable donations made in the 5 years preceding death may be applied against the year of death and the preceding year tax returns.
• If the gift is not a “gift by Will,” the tax credit accrues to the estate and may be used to offset up to 75 percent of the income of the estate in the year of the gift. This distinction is important because the greater income (and therefore the greater tax liability) is most often connected to the deceased’s terminal return, rather than the estate’s return.

A donation tax credit is not available to an individual or the estate unless the entity named to receive the gift is a Canadian registered charity or qualified donee under the Income Tax Act.

For those drafting the Will, it is important to ensure the legal name of the charity is used and not:

• the name under which the charity does its work in the public eye,
• the name that is a commonly used short form of the legal name, or
• a name that may be mistaken with another charity.

A searchable database of registered charities in Canada is maintained by the Charities Directorate of the Canada Revenue Agency. The database provides a starting point to determine if the organization is a registered charity or if further investigation is required by the executor.

Record-Keeping

From the charity’s perspective, in addition to the official record of gifts for tax receipting purposes, the charity will typically keep a file of the donor’s intentions. That may include supporting documentation such as the deed of gift or fund agreement where an endowment is being created and notes about the donor’s involvement with the charity during his or her lifetime. That is important if the final gift is challenged in a Wills Variation Act action or if there is a question about capacity.

It is also a reflection of the relationship between the donor and the chosen charities, which will vary depending on the donor’s interests and wishes. Getting to know the people who deliver an organization’s programs and services and the volunteer leadership can be very meaningful. It helps the donor better understand how the contributions are managed and the impact of the donor’s financial support on the beneficiaries of the services.

As the rapport builds, the donor can speak with the charity representatives to let them know the types of information and methods of communication he or she prefers and how the donor wishes to be recognized.

Another consideration is the designation of the gift. Most charities will encourage donors to keep the use of the gift as broad as possible, knowing the particular program, service, or research initiative may change over time. The charity likely will have a record of the donor’s wishes in its file.

If the gift is to be used for a specific purpose, it is important to check to see if there is a “power to vary” clause in the Will or deed of gift, permitting the charity to use the gift for other similar purposes if the intended purpose cannot be met.

Executor’s Contacts with the Charity

When the Will arrives, the charity might find the estate is simple, with:

• a specific amount left to the charity,
• the charity properly named, and
• sufficient money to pay the gift.

It could also be a complex gift of residue where the charity is misnamed or the gift is for a purpose that cannot be met or where the Will is being challenged — and everything in between.

In considering the options, the charity will look at the terms of the gift and whether it can carry out those terms. The charity will look at the authority given to the executor and trustee regarding disposition of assets, including:

• the power to transfer assets in specie (in the form it was at the date of death) to the charity,
• the provisions for executor’s fees, and
• information on whether a charging clause allows the professional executor to charge professional fees for his or her work.

Throughout the administration, the charity will monitor the administration of the estate and keep tabs on the progress, receive the interim distributions, and review the accounting and releases as required. The charity is ultimately responsible for valuing the gift and issuing the official income tax receipt.

The charity may rely on advisors such as real estate appraisers or agents to value real property, brokers to value gifts of securities, or accountants for valuation of company interests. There may also be specific gift-acceptance issues dealing with environmental liability or insurance coverage for personal property—all of which may involve seeking advice from professionals.

The charity may also seek advice from legal counsel if the executor fails to keep the charity informed of the progress of the administration or to release funds because the charity is misnamed or the stated purpose of the gift cannot be fulfilled. That is more likely where the charity is dealing with a family member or friend appointed as executor who may not be familiar with the requirements of the role.

In the next article, I will talk about the considerations for the executor and the charity in ensuring the client’s intentions are met.