Sara Neely, LLB, CRFE, is the Director of Philanthropic Services at the Victoria Foundation. This is the second part 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.
In the Fall issue of The Scrivener, I looked at the relationship between the executor and the charity where the charity is a beneficiary of an estate, specifically the rights and obligations of the charity and some of the considerations within the administration of the estate.
This article will consider the roles of the executor and the charity in ensuring the gift is properly received and receipted and the client’s intentions are met. Please read part 1 of this article here.
As the administration of the estate progresses, the executor will keep in contact with the charity representatives to let them know about the status of the sale of any property, the consolidation of bank accounts and investments, payment of liabilities, and the timing for the distributions to the beneficiaries.
Claiming the Tax Credit
Where the Will includes a charitable gift, it is possible to file the claim for the tax credit before making an actual distribution from the estate. Canada Revenue Agency will accept the following in lieu of an official income tax receipt.
- A copy of the Will
- A letter on behalf of the estate to the charity named in the Will
- A letter from the charity acknowledging the gift and stating it will accept the gift
- A copy of the disclosure statement filed with the probate registry
A copy of the death certificate should also be filed with the terminal return.
The donation and tax credit may be claimed on the terminal return with the tax credit offsetting up to 100 percent of the deceased’s income in the year of death. There is a 1-year carry-back for unused credits. A claim may also be made for any lifetime gifts that were not claimed in the 5 years leading to death. The executor will also allocate the proportionate income from the estate to the charitable beneficiary on the T3 tax return. The income is not taxable in the hands of the charity.
Receiving and Receipting Different Types of Gifts
Types of gifts may be treated differently for the valuation of the gift and the tax receipt. Here are some examples.
- Specific cash gifts or specific property: Value of cash or property at date of death
- Residual bequests: Value at the date of death
- Securities that are transferred in specie as directed in the Will: Closing value as at date of death
- Securities that are transferred in specie at the discretion of the executor to take advantage of the tax savings: Closing value on the date the shares are received
- Life insurance policy proceeds where the charity is beneficiary only: Value of the proceeds when received
- Life insurance premiums where the charity is the owner and beneficiary of the policy: Value of the premiums paid each year during the donor’s lifetime
- Direct designations of RRSP and RRIF accumulations: Value of the accumulations when received
The charity as beneficiary of an estate can find itself involved in a legal action such as a Wills Variation Act claim, interpretation of the Will, claims of incapacity, or undue influence. The charity will seek advice from legal counsel and in most cases, refer the matter to their counsel for ongoing litigation or settlement. They may also engage in mediation where it is appropriate.
Most often, these claims arise where the individual did not discuss their plans with family or they put their plans in place without appropriate legal or financial advice. If more clients and donors ask questions, and as more advisors and charities work together, the issues that can arise could be dealt with through thoughtful estate and gift planning while the client is alive.
Where there is more than one charity, and assuming a common interest, they will often choose one lawyer to act for all charities. In balancing the public relations issues with the desire to ensure the donor's wishes are met, the charities want to speak with one voice in dealing with the executor or family members. That is also more cost-effective and expedient for the charities and for the estate.
The charity is often excused from the Wills Variation Act action when the gift to the charity is small or the family doesn’t want to disturb the charity’s portion of the estate. That is where the notes on file and evidence of the donor’s intentions with respect to the charity are important.
Compensation for Executor Work
The charitable beneficiary will want to see the executor fairly compensated for the work on behalf of the deceased. At the same time, the charity has a duty to ensure the donor’s intentions are honoured and the value of the gift is not diminished by unsubstantiated expenses or a failure to achieve the maximum value possible in the circumstances.
A charitable beneficiary might be reluctant to question executors about estate accounts due to public relations concerns. As a result, sometimes important matters which should be raised are left unquestioned. It is a matter of balancing these interests in encouraging gifts to charity while making sure everyone involved is fairly paid for the work carried out in the administration of the estate.
Sometimes, the executor or advisor may have provided services to the client during the client’s lifetime and now seeks to claim an additional fee. While this is not generally the concern of the beneficiary of the estate, it may be considered by some as a factor in the review of the request for compensation.
Where the charity is a residual beneficiary, it will look to see if the Will is silent about a fee for the executor’s work, if there is a provision in the Will for a specific amount, or if there is a fee agreement that was signed by the donor at the time the Will was prepared. Where the Will is silent, the Trustee Act comes into play. It provides for a fee of up to 5 percent of the gross aggregate value of the estate.
When a charity is reviewing the executor’s accounting, it will consider evidence of the time, effort and contribution made by the executor and the expenses claimed for services provided by other professionals such as legal, accounting, or property appraisal fees. It would be guided by the case law and how the courts have viewed these issues.
Just like any beneficiary reviewing the accounting, these are the factors the charity and its advisors will consider. Where the estate is simple with few assets, it will likely approve a fee of less than 5 percent — reserving that amount for more complex estates. While a beneficiary has the right to seek a passing of the accounts before the courts, in the majority of estates the charity and the executor will settle on the compensation once the information is clarified.
Given the significant responsibility that the executor is being asked to carry out, deciding on the appropriate compensation for this work is an important matter for the client to review with his or her advisor when the Will is prepared.
To avoid the possibility of challenges to the claim for compensation, the client may provide for a specific amount in the Will itself or sign a separate fee agreement when the Will is prepared.
Ensuring the Donor’s Intentions are Met
Once the gift is received and the accounting is settled, it is the charity’s responsibility to ensure the donor’s intentions are met as closely as possible. The gift should be allocated to the purposes described in the Will or other deed of gift—such as the purchase of equipment, funding for a specific research initiative or the development of a new program or service.
Where the Will or the deed of gift says the gift is unrestricted or for general purposes, it will be used to support the area of greatest need within the charity.
The charity may also refer to notes of conversations with the donor during his or her lifetime and any past record of gifts to best meet the donor’s intentions for the use of the gift, to decide if the donor’s family should be consulted and to determine how the donor should be recognized for this contribution. The terms of the Will or gift deed are paramount in meeting the donor’s intention; this other information is more for the “softer” stewardship aspects of the gift and the donor.
Ensuring the donor’s intentions are met brings us full circle to what the client intended at the outset. Here are some questions he or she may ask in advance when planning the gift.
- What do I want to achieve?
- Do I want to make a gift for a specific purpose?
- Do I want to let the Board of the charity decide what is best?
- Do I want my gift to be anonymous?
- Do I want my name on a donor recognition wall or listing?
- Do I want to make an immediate gift?
- Do I want to create an endowment fund so the charity receives a gift every year in my name?
It may seem there are lots of questions. What the questions reflect is the opportunity for a donor to work with the charity, the executor, and the donor’s advisors to put in place a gift that is meaningful to the donor and one that will carry out the donor’s legacy for the community. From all perspectives, that is the best result.