Will Planning: The Charitable Remainder Trust
Individuals who wish to give to charity by will but also wish to provide enough funds to sustain family and friends for their lifetimes might consider a charitable remainder trust. Essentially, such a trust provides an immediate charitable tax credit even though the funds are not transferred to the charity until the life interests expire.
Subsection 118.1(5) deems a gift made by an individual's will to have been made by the individual immediately before death, enabling the gift to be eligible for a charitable tax credit for the deceased's final taxation year. According to the CRA (document nos. 9918215 and 2000-0053185, and Interpretation Bulletin IT-226R), the subsection will apply if
it is clear that the testator intended to make a gift to a registered charity;
the amount of the gift to the charity is stipulated in the will as a specific amount, a specific property, or a percentage of the residue of the estate;
if the gift is the residue (or a portion thereof) of the estate, the will clearly specifies what is to be paid from the estate in determining the residual amount;
the will does not provide for discretionary capital encroachments by any person; and
there is a gift at law.
In making a will, a testator balances how much to give to family and friends and how much to give to charity. Some testators will want a clear division between property given to charity and property given to family and friends. Others are uncertain and will want the estate to be flexible enough to respond to the needs of the beneficiaries. For the latter type of testator, a charitable remainder trust may be an attractive solution that preserves the tax credit in respect of a charitable gift while ensuring that family members and friends are provided for.
An example of a charitable remainder trust made by a will is described in an advance ruling from the CRA (document no. 2002-0117823, undated). A testator provided in his will that, among other things, certain property was to be held in trust for the surviving spouse as the sole income beneficiary, and on the death of the surviving spouse a portion of the remaining capital of the trust was to be given to a charity. Pursuant to an agreement, neither the trustees nor the surviving spouse could encroach on the capital of the trust. The CRA ruled that subsection 118.1(5) would apply to the gift to the charity to deem the gift to have been made immediately before the testator died.
The charitable remainder trust enables the testator to make a gift of property to a registered charity and obtain the corresponding tax credit while giving a person other than a registered charity income from the same property. It should be noted that the present value of a gift of the remainder interest to charity, and the value of the corresponding tax credit, will be affected by the estimated length of any life interests (in the above example, the estimated life span of the surviving spouse) and other factors. This may significantly reduce the tax credit for the gift of the remainder interest to the trust and lessen the tax advantages of a charitable remainder trust.
Thorsteinssons LLP, Vancouver