Planned Giving - Part 2 - Hull on Estates and Succession Planning #196
Listen to: Planned Giving - Part 2 - Hull on Estates and Succession Planning #196
This week on Hull on Estates and Succession Planning, Ian Hull continues his discussion from last week on Planned Giving.
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Ian Hull: Hi and welcome to Hull on Estates and Succession Planning. You’re listening to, and some of you may be watching episode 196 on February 24, 2010.
Well welcome back, and it’s Ian Hull again solo for one more week, and hopefully we’ll have Suzana back next week. We’ll drag her into this discussion of what we really hope is going to be an interesting mini-series on planned giving and some of the ideas and concepts that exist. I had left the last podcast talking about charitable remainder trusts but I had started it again looking to Wikipedia and talking about planned giving and the definition of planned giving. And basically the idea that we’re going to do something a little more sophisticated than an outright gift to a charity.
So what’s sort of planned giving in the context of charitable remainder trusts? And remember again as I said, was that this is a tool, an illustrative tool, but it’s a really I think useful tool to use for prime giving purposes. And what it does is, as I say, this. I said before and I’ll say it again – it creates an income stream for the life tenant so the spouse, often would be the case, you would leave enough money in the trust. You’d put X dollars in the trust that would create enough income for the spouse for life and on the spouse’s death, the capital goes to the charity.
Now this is a tool that is used pre-death in that sense. You are doing your planned giving, you are creating your planned giving pre-death. Lots of people do their giving post-death through their Will. But this is what we call an inter vivos trust that is especially created for…well as we say, a charitable remainder interest. And why this can be a useful tool is the special treatment that it gets from CRA’s standpoint. But more importantly, the peace of mind that it creates for you. If you have wealth, you want to make sure ultimately it ends up in a charity’s hands. But you have financial needs that you have to meet in the interim, i.e. making sure your spouse has enough money to live on. This is a great tool. And as I say, the tool’s got some really neat spins on it in respect of what CRA and the tax person is going to say about it. Now we don’t intend to get into the deep, dark world of tax too heavily except to say that this structure can create an opportunity for you to consider when you’re sitting down with your goal of wanting to leave money to a charity at some point in time and a goal to maintain enough income for that identifiable dependant or dependants identified in your trust. So this structure, as I say, is a useful tool.
Now the tax benefits – let’s just say this generally…the tax benefits are such that the charities may be able to issue receipts at the time the trust is established or at the date of your death. Much will depend on the structure of the trust. All I’m saying is that I think we’ve got opportunities there that you want to sit down with your tax advisor and look at. Now the term charitable remainder trust isn’t actually a defined term that you’re going to find in the Income Tax Act. This is not a tool and we’ll talk about in later podcasts some of the specific tools that exist for charitable giving and planned giving. But this isn’t specifically a tool for planned giving. What it is is it’s a trust structure that can be used for the planned giving. And all of the rules of trust law that we’ve been talking about for many podcasts all apply. And I think the one thing that is helpful though is that there are CRA policies that help us identify what advantages we can take after we’ve created the charitable remainder trust. And, for example, CRA has IT bulletins, Interpretation Bulletins. There is one, 226R, for example. And it talks about the immediate receipt as being available for a donation and how it works. The terms of the trust itself are some of the things that the CRA are going to look at. So, as I say, the structure is the income beneficiary for life or a specified period of time, the donee is the capital beneficiary, the settlor is yourself or your client and that there’s typically no power to encroach because that also creates new problems in terms of valuing the gift for the CRA purposes.
So generally the main thing to remember, of course, is that a charitable remainder trust is not tax exempt per se, purely tax exempt. So to create a charitable remainder trust doesn’t solve all of your problems. When you create a trust, and we’ve talked about this before, there’s a deemed disposition of the fair market value the day you create that trust is established and so there’s a deemed disposition that you can’t ignore. And there’s still the possibility that capital gains are going to be paid on that when you create the trust, on that money when you create the trust. But again, there are rules about valuing the gift, creating the trust itself that are helpful, that are complex in some ways from CRA’s standpoint but are helpful to consider on your tax approach.
Now a charitable remainder trust can be made during your lifetime or after your lifetime. It can be both inter vivos or it can be testamentary. And in the case of it being inter vivos, you’re not going to enjoy the tax benefits. When I say if you make it during your lifetime, you’re not going to enjoy the tax benefits unless the trust is irrevocable because the taxing authority, CRA, is going to say well look, you might change your mind in 5 years and all of a sudden pull all of that money out of the trust and we’ve given you this great tax break for creating the trust with this charitable remainder person being the charity. And we’ve given you all of this advantage for having done that and then you go and revoke the trust, pull all the money out and use it for other purposes. So they’re not going to let you do that. They want it to be an irrevocable trust. And really as I say there can’t be the possibility of capital encroachment. So you’ve got to be ready to…I tell my clients…that you’ve got to be ready to identify a certain amount of money, place it in the trust, identify with certainty the time period, i.e. the life, for example, the spouse and accept the fact that you can’t change it or you’re not going to have any of the benefits of the taxing authority, and accept the fact that you can’t encroach on the capital. So if the income stream turns out not to be enough for your surviving spouse, that’s kind of life in the big city and you can’t rework that without creating all sorts of new problems and new, identifiable taxing problems with you. So as long as you stay within the four corners of the structure of the trust, you have some really interesting benefits to it that I’m going to dive into with hopefully Suzana in our next podcast, to get us really to fully understand what we call the charitable remainder trust advantages. But we understand the non-tax advantages is that we’ve identified someone whose going to enjoy some income during lifetime and we’ve identified before we pass away that the gift of capital, that amount of money you started with, will pass to the charity of your choice. So you’ve felt good. You’ve identified it. You know the charity will one day benefit. And the nice twist is when you create these trusts, what advantages from a tax standpoint do you get to enjoy during the life of that trust, both while you’re alive and of course, while the life tenant is alive. And we’ll talk some more about that in our next podcast.
So thanks very much for joining me again this week. And we look forward to working through the charitable remainder trusts and other unique Estate planning and planned giving ideas to develop as we go along. So thanks very much.
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