Estate Tax Eliminator Gifts: are they effective?
By Linda Caisley, Notary Public
When we make a will for you, we will ask you whether you would like to make a gift to a charity through your estate. Giving a gift to a charity in your Will is a wonderful way to keep enriching your community after your death, and to give one last boost to causes that were important to you during your lifetime. You might even be able to give a bigger gift through your estate than you could have made during your lifetimes.
If you leave a qualifying charitable donation in your will, your estate will receive a charitable donation receipt, which can be used to offset the taxes it must pay on your final return.
There is a wills clause that some clients ask about from time to time called the “estate tax eliminator clause”. The idea with this clause is that your executor determines how much tax your estate will likely have to pay on your death, and then makes a donation to a charity that will produce a charitable donation receipt big enough to offset this tax.
It sounds like a great idea, but is it effective? The only way this clause can be effective is if the charity can actually issue you a donation receipt, and that might not happen unless it can meet all of the requirements for a charitable donation.
A charitable donation is a type of gift. A gift has several important elements:
the donor must own the gift: you can’t give away what you don’t own
the gift must be voluntary: you must be making the gift because you want to, not because you have to, or because you have been pressured into doing so
there can be no consideration for the gift: you must not receive any advantage in return for the gift, and you cannot have any expectation that the beneficiary of the gift will do anything (or give anything) in return for the gift (charitable donation receipts being the exception as long as they are only issued when certain criteria have been met)
the gift must be of real or personal property, not of services: you can’t make a donation of your time, or your personal services, only your money or your assets
the person giving the gift must have what is called “donative intent”: you must intend to make a gift, not to enter into a contract, or make an exchange (this is an important criteria when considering charitable donation receipts)
the gift must be both appropriately given, and received: it’s not enough for you to simply send a cheque to your grandson at Christmas, he must receive it and deposit it into his bank account; in some cases, with large gifts, deeds of gift are useful, so the beneficiary can acknowledge receipt of the gift; likewise, if the gift is of a larger asset, you must deliver the registration documents, keys or other “ownership” records
So consider again the idea of including a clause in your will that asks your executor to make a donation to your favourite charity, in an amount large enough to eliminate your final tax.
Firstly, do you have donative intent? Likely not, as your primary purpose (often blatantly stated in the wills clause) is not charitable, but rather to accomplish specified tax planning goals. If CRA determines that you did not intend to make a gift, then no charitable donation receipt can be issued.
As well, if the amount of the advantage back to your estate is more than 80% of the fair market value of the gift, then the charity may not be able to issue a donation receipt for the gift. Your charity must get an opinion from CRA before it can issue a charitable donation receipt if it believes this could be a problem.
If your will requires your executor to give a substantive donation to a charity, and it turns out that the charity is not able to issue you a charitable donation receipt, your executor cannot simply cancel the donation.
Your executor, once probate has issued, must carry out the terms of your will, even if the consequences end up being different than what you expected. In theory, the charity could potentially turn down the gift if it was not able to issue the receipt you expected, or, if the clause was carefully worded (such that the gift failed if an appropriate charitable donation receipt could not be issued), but those options are not guaranteed.
Alternatively, if the charity does issue you a donation receipt and your estate gets audited, CRA can potentially overturn the issuance of the donation receipt.
Think carefully before including an “estate tax eliminator clause” – it could be devastating to your estate financially if it is required to give a charitable donation without the benefit of the anticipated charitable donation receipt. If in doubt, you may wish to get a ruling from CRA as to whether a charitable donation receipt could be issued under the circumstances. An accountant would be able to help you with this.
Visit our website for a notary near you; we would be pleased to help you make a charitable donation in your will.