Q.Tina, when your clients want to include a charity in their estate plans, what is their biggest consideration?
A: Most parents dislike the idea of disinheriting their children and want to maximize the inheritance that they leave for the next generation. For those parents who are philanthropically inclined, the biggest dilemma has always been how to leave a bequest to their favorite charities without disinheriting their children or dramatically reducing their inheritance. I always tell my clients that it is indeed possible to support both your kids and your favourite causes in your estate planning.
Q: Why is it important to consider a gift to charity when estate planning?
A: Not only can you maximize your impact on your favourite charity with a charitable gift in your will, but your heirs can benefit as well. Final estate tax returns typically produce a hefty tax bill. However, the charitable donation tax credit system in Canada softens the blow to the bottom-line on taxes owing on your final return. As a result, bequests to charities will benefit from a generous tax credit. In fact, if your estate ends up in the top tax bracket, your tax credit can be almost half the size of your donation!
Q. What would be one additional piece of advice that you give to philanthropic clients with children?
I like to encourage philanthropic individuals to get their kids onboard with their estate gifts to charity – or to at least inform them. The reason is two-fold. Not only are you creating a lasting legacy for yourself with your causes, but this can also be a gift to your kids. The future belongs to our kids and when we are gone, they will be the ones making this world a better place. Therefore, it is important that we get them interested in giving back. It can be truly empowering for your family, your legacy, and your community.
Q. Do you have some examples of how to structure an estate to provide a healthy inheritance for children while also making an impact on a charity?
Let’s look at an example. Mrs. Smith is a widow in her 70’s and has accumulated $450,000 in her RRIF which would be fully taxable as income upon her death. Her annual income is $50,000. In addition to the RRIF she owns a house that is worth $1,000,000. Mrs. Smith has been a supporter of her community hospital for years and has volunteered there for over 30 years. She would love to leave a bequest to her community hospital but is worried that if she does that, she will disinherit her three children.
First, let’s see what it looks like if Mrs. Smith were to die without leaving any bequest to any charity:
RRIF: $450,000 minus $224,000 for taxes due on death = $226,000 after tax
Principal Residence: $1,000,000
Net Estate: $1,226,000
Net inheritance for each child: $408,666
Now, if Mrs. Smith were to leave a $20,000 bequest to her community hospital in her will, this is what her children would inherit:
RRIF: $450,000 minus $224,000 tax due on death = $226,000 after tax
Principal Residence: $1,000,000
Charitable Bequest: $20,000
Charitable Donation Tax Credit: $8,700
Net Estate: $1,214,700 ($226,000 + $1,000,000 – $20,000 + $8,700
Net inheritance for each child: $404,900
If Mrs. Smith were to leave a $100,000 bequest to her community hospital in her will, this is what her children would inherit:
RRIF: $450,000 minus $224,000 tax due on death = $226,000 after tax
Principal Residence: $1,000,000
Charitable Donation: $100,000
Charitable Donation Tax Credit: $ 44,000
Net Estate: $1,170000 ($226,000 + $1,000,000 – $100,000 + $44000)
Net inheritance for each child: $390,000
If Mrs. Smith were to donate her entire RRIF and leave a $450,000 bequest to her community hospital by naming the charity the beneficiary of her RRIF, this is what her children would inherit:
RRIF: $450,000 minus $224,000 tax due on death = $226,000 after tax
Principal Residence: $1,000,000
Charitable Donation: $450,000
Charitable Donation Tax Credit: $200,000
Net Estate: $976000 ($226,000 + $1,000,000 – $450,000 + 200,000)
Net inheritance for each child: $325,333
The bottom line is that a donation of $20,000 would only reduce the inheritance that Mrs. Smith could leave for her three children by $3,766 ($404,900 per child vs $408,666 with no bequest) and a donation of $450,000 would reduce the net inheritance for each child by $83,333 ($325,333 per child vs $408,666 with no bequest). However, it would mean providing anywhere from $20,000 to $450,000 of funding for purchasing much needed equipment for the community hospital and creating a lasting legacy for Mrs. Smith.
Of course, everyone’s personal financial situation is different. I always work with clients on customizing a financial and estate plan that would suit their needs. I highly encourage your supporters to seek professional advice from their advisors.
The opinions expressed are those of the author and not necessarily those of Assante Capital Management Ltd. Please contact her at 905-707-5220 or visit https://tinatehranchian.com to discuss your particular circumstances prior to acting on the information above.
The case study mentioned in this article is provided for illustrative purposes only and does not represent an actual client or an actual client’s experience, but rather is meant to provide an example of our process and methodology. The results portrayed are not representative of all of our clients’ experiences.
