Charitable Remainder Trusts

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Charitable Remainder Trusts

Broadly defined, a Charitable Remainder Trust (CRT) is any Trust, living (inter vivos) or testamentary, where all of a portion of the remaining Trust assets are distributed to a charity at the termination of the Trust.

It was not until the early 1990’s that the CRT became known widely in charitable circles in Canada.  Donors in the United States, however, have been using it successfully for years.  Its use is so commonplace that it is the second-most popular form of planned giving vehicle, after the Bequest.

Simply, the Trust is a legal arrangement in which one person (the “Settlor”) transfers irrevocably legal title to a “Trustee” to manage property for the benefit of another person or institution (the “Beneficiary”).  The Trustee is a person or a Trust company that manages Trust property according to the instructions in the Trust agreement and the laws governing Trustees.  A “Trustor” is a person who creates a Trust either by a Will or by another Trust instrument.  In the case of the “Charitable Remainder Trust”, the Trustor is a Donor.  A formal Trust will include a Trust Agreement which gives instruction to the Trustee as to how the property is to be used for the benefit of the Beneficiary (ies).

More particularly, a CRT is a planned gift whereby a donor makes a gift (usually an irrevocable one) to the Canadian Medical Foundation through a Trust agreement.  The Donor (Settlor) transfers property to a Trustee who holds and manages it.  If the property is income-producing, the net income will be paid to the donor and/or to other named Beneficiary (ies).  When the Trust terminates, (either at the death of the Beneficiary (ies) or after a term of years), the Trust remainder is distributed to beneficiaries.  If the Trust is irrevocable, the donor is immediately (at the time of the establishment of the Trust) entitled to an official tax receipt for the present market value of the donated residual interest.

The Charitable Remainder Trust in Canada

A Canadian CRT can be established in one of two ways:  as a living (or, inter vivos) Trust established during the life of the donor, or as a testamentary Trust established from a donor’s Will.  CRT’s are unique in a number of ways:

  • The Donor establishes an irrevocable gift to charity in return for a discounted tax receipt as well as a fully taxable tax flow (interest income for life);
  • The charity receives an irrevocable gift and upon the termination of the Trust, will receive the remainder;
  • Donations cannot be contested by Beneficiaries of the estate;
  • Probate and settlement fees do not apply to the gift.

These gifts are typically made by persons over the age of 60 who want to make a future gift and obtain present tax relief but also want to preserve investment income for themselves and/or a survivor.

In a living Trust, the donor funds the Trust by irrevocably transferring ownership of their assets (a sum of money, securities, personal or real property) to a Trustee, who may be the Canadian Medical Foundation, another individual or a financial institution such as a Trust company.  Then a Trust document is created setting out the rules of the Trust and naming the Canadian Medical Foundation as residual Beneficiary.

This document is signed by the Donor and the Trustee.  The present value of the residual interest is calculated and the Canadian Medical Foundation gives the donor an income tax receipt for the calculated amount.  Income is paid by the Trustee to the Beneficiary (usually the Donor) for life or for a term of years, as outlined in the Trust terms.  Upon the termination of the Trust, the Trustee pays out the remaining Trust assets to the Canadian Medical Foundation to support charitable programs such as financial aid for deserving medical students or physician health and well-being programs.

For a testamentary Trust, the Donor drafts a new Will or revises an existing Will in which the terms of the testamentary CRT are set out.  Here, the Will is drafted in the usual way, and provisions for the Trust are contained in specific clauses.  Although in this case the Trustee is not a signatory to the Will, the Trustee must nevertheless agree to act.  Usually, the terms provide support to a loved one or other family member for as long as they live, with the assets coming to the charity following the death(s) of the Beneficiary (ies).  The testamentary CRT is irrevocable and will only be established upon the death of the donor.

Most Likely Potential Donors to Use the CRT

The CRT is a vehicle primarily of interest to upper-income donors 60 years or older.  The Donor has extensive holdings, is in a high marginal tax bracket, and has philanthropic intentions and ability to gift some assets.

The benefits of the living or inter vivos CRT are many:

  • The satisfaction of establishing a substantial gift;
  • The provision of lifetime income to the donor;
  • An immediate tax receipt;
  • Donor is free from investment worries;
  • An estate planning tool which avoids probate and is non-contestable; and
  • Provides privacy for the donor.

The benefits of the testamentary CRT include:

  • Provision of lifetime support to a loved one;
  • Provision of a tax receipt to the estate;
  • The Trust is revocable during life and takes effect on the death of the Testator.

Example – Donation Receipt

Dr. Prospect Donor transfers $100,000 cash into a CRT and names the Canadian Medical Foundation as the remainder Beneficiary.  The donor is 75 years of age and the discount rate has been determined to be 5% (based on the long-term bond rate).

$100,000  =  $62,601.00

(1+.05)9.6

Therefore, Dr. Donor receives a charitable tax receipt valued at $62,601.00

Life Insurance

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A gift of insurance can allow a Donor to make a much larger gift to the Canadian Medical Foundation than they might otherwise be able to consider. Tax savings today are real.

There are a number of very common methods to utilize life insurance in your charitable giving and tax saving plans.  Proceeds of life insurance policies provide your beneficiary, in this case the Canadian Medical Foundation, with a lump sum that can really have an impact on our charitable programs to support Canada’s health care system and the physicians from coast-to-coast-to-coast that are its core.  Often, heirs use the proceeds from insurance to help off-set funeral cost, capital gains taxes, or other end of life expenses.  However, a gift of life insurance to the Canadian Medical Foundation is not part of someone’s estate and therefore is not subject to capital gains, or other taxes.

If one or more of your life insurance policies no longer fits your financial strategy, consider:

  • Transferring your paid-up policy to the Canadian Medical Foundation, and in so doing receive an immediate charitable tax receipt for the full-value of the policy;
  • If premiums are still payable, transfer ownership, naming the Canadian Medical Foundation as beneficiary. You continue to pay the premiums but annually get a tax-receipt for the value of the associated costs; or
  • Simply name the Canadian Medical Foundation as beneficiary of the policy.

Depending upon which of the options are chosen, the tax advantages could be considerable for you, as follows:

  1. When the Canadian Medical Foundation is named as the irrevocable beneficiary, we can immediately issue a charitable tax receipt to you for the full cash value of the policy, plus any accumulated dividends;
  2.  If you are still paying premiums, the Canadian Medical Foundation will issue a receipt for the full cash value, but you will also receive a cash receipt for each additional premium paid; but no donation receipt will be issued for the death benefits;
  3. Simply naming the Canadian Medical Foundation as beneficiary, without gifting the policy, will not reduce your taxes today. However, in the future, when CMF receives the proceeds of the policy and, if the policy is named specifically in your will, the CMF will issue a charitable tax receipt, which will benefit your estate.  In this case, you will be entitled to claim a certain donation credit that can off-set estate taxes in the year of your death for proceeds donated to charity to a maximum of 100% of net income in the year of your death.  Where the donation exceeds your net income, the excess can be carried back to the year prior to death and up to 100% of net income in that year can be claimed as a donation as well.  While probate fees still apply, the donation credit will far outweigh these fees.

If you would like to make a substantial gift in the future, you can contribute small yearly premiums over time and receive tax-deductible receipts for the amount of your payments.  You may simply arrange with a life insurance company to transfer ownership and beneficial rights to the Canadian Medical Foundation.  You will have the peace of mind knowing that you have made a significant contribution to a national charity focused on supporting physicians and Canada’s health care system.

Additional Alternatives

You may also name the Canadian Medical Foundation as an alternative beneficiary by changing the beneficiary declaration in your policy (whether it be term insurance or otherwise) to read:  “To my wife (husband) if she (he) survives me, but if she (he) predeceases me, then to the Canadian Medical Foundation.”

Another option is to make the Canadian Medical Foundation a co-beneficiary of your life insurance policy to the extent of any dividend accumulation.  Then, the benefits would be divided, with the primary beneficiary receiving the face value and the Canadian Medical Foundation receiving the accumulated dividends.

Registered Assets

Another valuable advantage exists.  If you hold registered assets, such as a Registered Retired Income Fund (RRIF), gifting a life insurance policy to charity can ensure that your heirs receive the full value of your registered assets.

Normally, when a married person passes, their spouse becomes the owner of the RRIF tax-free.  However, any other heirs would only get 50% of the funds while the government gets the rest.  However, if one takes out a life insurance policy with approximately the same value as your RRIF and designate the Canadian Medical Foundation as your beneficiary, then the charitable tax receipt from your donation will effectively offset the portion of the RRIF owed to the Canada Revenue Agency.

You can name the Canadian Medical Foundation as a beneficiary of your Registered Retirement Savings Plan (RRSP), RRIF or life insurance policy.  Doing so will provide you with a significant donation tax credit in the year of your death, which can offset other taxable income.

Gifts of Securities

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A common misconception about planned or legacy giving is that Donors benefit only in the future.  In fact, Donor can often benefit immediately.

Gift of securities and mutual funds

How It Works

Donating a gift of securities, stocks and bonds, is simple and can have great tax-saving advantages for the Donor while making a real difference to the charitable work of the Canadian Medical Foundation.

Gifts eligible for this preferred tax treatment can be funded with a variety of securities:

  • Prescribed bonds;
  • Units of mutual funds; and
  • Shares, warrants, bills and futures that are listed on the stock exchanges prescribed by the Canada Revenue Agency (CRA).

Great Tax Advantages for You

A 2006 tax provision made by Canada Revenue Agency (CRA) gives donors who contribute appreciated stock and bonds the chance to eliminate the amount of capital gains tax otherwise payable to the government.  Now, none of the gain (the amount by which the current fair market value exceeds the average cost base) will have to be considered as income.  Selling those same securities would result in a capital gains tax calculated on 50% of the realized gain, creating a much higher tax bill payable to the government in that year.

The Charitable Donation Offsets Taxes Due

When you make an outright gift of appreciated securities, be it stocks or bonds, you will receive an official charitable tax receipt for the fair market value of the gift.  This is based on the value of the securities at the close of trading on the date of ownership transfer to the Canadian Medical Foundation.  This tax receipt provides a non-refundable tax credit that offsets income tax due on other income.

How To Make a Gift of Securities

It’s easy and straightforward. Have your broker transfer your shares electronically to the Canadian Medical Foundation

CMF Securities Transfer Form

OR

 If you hold the shares, send them by Registered Mail or Courier or hand-deliver the certificate that has been endorsed by you.  Your signature must be guaranteed.  Do not assign the certificate to the Canadian Medical Foundation.

If you register mail, courier or hand-deliver unendorsed shares, also mail, courier or hand deliver an *endorsed Power of Attorney (in a separate envelope when mailing it).  Your signature must be guaranteed. Do not assign the certificate to the Canadian Medical Foundation.

You may also obtain blank powers from your broker.  Please be sure to sign the power exactly as your name appears on the certificate or bond.

*Your signature must be guaranteed by a Commissioner for Taking Oaths or a Notary Public or a bank or trust officer.  A Barrister & Solicitor has this power.

 Mail, courier or hand deliver to:

 The Canadian Medical Foundation
407, 1500 Bank St
Ottawa, ON  K1H 1B8

Please enclose a letter stating the purpose of your gift.

How to Make a Gift of Mutual Funds

If you hold mutual funds in an account with a major brokerage firm, or they are held in connection with a mutual fund broker/dealer, you may have your mutual funds transferred to the Canadian Medical Foundation.

The fund company may require you to sign a fund company disclaimer.  Contact your broker/dealer to obtain the required form for your signature.

*Your signature must be guaranteed by a Commissioner for Taking Oaths or a Notary Public or a bank or trust officer.  A Barrister & Solicitor has this power.

Valuation of Your Gift

Valuation of your gift is based on the closing price of the share on the day that the Canadian Medical Foundation or our broker receives the securities and/or mutual funds.  If there is no closing price on that day, the closing price on the last preceding day for which there was a closing price will determine the value of the securities for charitable tax receipting purposes.

 

Gift Annuities

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The charitable gift annuity is a popular planned giving instrument for elder Canadians, as it allows a person to make a significant contribution, while maintaining financial security.

There are many benefits of a gift annuity:

  • A gift annuity allows you to make a significant gift, yet still enjoy the income from that gift;
  • A gift annuity frees you from investment and management worries;
  • Payments are fixed for your lifespan and, depending upon age, much of the income may be tax-free;
  • An immediate tax receipt is available for a portion of the gift;
  • You may make an annuity gift for as little as $10,000 and may add future gifts anytime; and,
  • You may name your spouse as a joint survivor and the payments will continue for as long as either lives.

What Are Gift Annuities? (Also known as Gift Plus Annuities)

A gift annuity allows a donor to make a gift, in most cases receive a generous charitable tax receipt and receive an annual tax-free payment, an annuitant, for the rest of their lives. The can be established by and for an individual or a couple.

A gift annuity is a type of “irrevocable deferred gift.”  This sort of classification, pure legalese, does not go far in describing what the gift annuity accomplishes for the Canadian Medical Foundation and its philanthropic efforts across Canada and the Donor.  It is a useful classification for comparison purposes, though.  While the bequest made in a will can be defined as a type of “revocable deferred gift” (since the Donor (or Testator) can change his or her mind about the gifts made in a will (bequest)), an annuity is a final decision.

How Does It Work?

Starting with a minimum gift of  $10,000 (that can be funded with cash or other valuable property, such as stocks), a charitable gift annuity is established with the Canadian Medical Foundation, and, in return, the Donor receives a charitable tax receipt (calculated using annuity tables), a regular income (the annuity) for as long as the donor lives, and of course the opportunity to meaningfully support the philanthropic programs of the Canadian Medical Foundation, such as those providing financial aid for medical students, investments in timely research, and support for programs and services to address physician health and well-being from coast-to-coast-to-coast.

What Does a Gift Annuity Accomplish?

Using a gift annuity, a Donor can accomplish achieve their philanthropic goals, such as:

  • The Donor may give a larger and more impactful gift in their lifetime;
  • The Donor receives a tax-favorable income – for life; and,
  • The gift provides ongoing support for the good charitable work of the Canadian Medical Foundation.

Who Utilizes the Gift Annuity?

Donors who are 70 years of age, or older, usually see the greatest advantages to using this type of gift vehicle because annuity income is taxed based on life expectancy tables approved by the Government.  The plan allows a Donor to give a substantial gift, without losing the benefit of the investment revenue that could be earned.  In fact, when the tax advantages are factored in, many Donors will find that their net return is higher through a gift annuity.

An Example:

Mark Peters, age 70, wants to make a donation to the Canadian Medical Foundation but is concerned about having enough funds to meet his living expenses.  He holds a $10,000 Canada Savings Bond.  His annual return is 7.5%, or $750 per year.  He will pay 40% tax on this amount, leaving him only $450 to spend after he has paid his taxes.

Now, if Mr. Peters had purchased a CMF Gift Annuity at 8.5%, he would receive an immediate tax receipt of $2,265, which would save him $906 on his next tax return.  Of more significance, is the fact that the $850 would be tax-free for his lifetime.

Another Example

This option is relatively new, available only after January 1, 2003.  Now, there are good reasons to fund gift annuities with appreciated stocks, mutual funds and dividend reinvestment plans held outside of Registered Retirement Income Funds (RRIFs) and Registered Retirement Savings Plans (RRSPs).

An 83-year-old Donor or other CMF supporter funded an annuity with a transfer of stocks worth $100,000, which was originally purchased for $50,000.  This is a capital gain of $50,000.  Gift annuities funded with appreciated stocks will result in favourable tax treatment for a portion of the gain.  Actual amounts will vary according to your own circumstances.

  1. If she transfers ownership of stocks to fund the CMF Annuity:

If she transfers ownership of stocks to fund the CMF Annuity:

Annuity $100,000
Charitable Gift Tax Receipt (A) $45,942
Capital Gain $50,000
Capital Gain Inclusion 46% gift, at 25% inclusion rate = $5,743
(Split receipt) 54% non-gift, at 50% inclusion rate = $13,514
Reported Capital Gain Income (B) $19,257
Income Tax Payable @ 45% marginal rate X (B) $8,666
Income Tax Receipt Remaining (A) – (B) $26,685

Now, compare the same Donor who sells stocks first, then funds the annuity with cash:

Annuity $100,000
Charitable Gift Tax Receipt (A) $45,942
Capital Gain $50,000
Capital Gain Inclusion 46% gift, at 25% inclusion rate = $0
(Split receipt) 54% non-gift, at 50% inclusion rate = $25,000
Reported Capital Gain Income (B) $25,000
Income Tax Payable @ 45% marginal rate X (B) $11,250
Income Tax Receipt Remaining (A) – (B) $20,942

The result is that while the tax receipt in both cases covers the taxes owing, the direct gift of stocks results in a much greater tax savings.  The split receipt treatment of the capital gain inclusion has created tax savings that simply were not present before.

Also, the remaining tax receipt can be used to offset other income tax payable or to relieve tax liability in other assets the donor may have.  For example, one could sell some highly appreciated stocks, pay the capital gains tax with the tax receipt and buy the stock back at a new higher rate.  Very beneficial!

Wills and Bequests: The Most Popular Planned Giving Vehicle

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The most common form of planned gift is the bequest – making a gift through one’s Will. (i.e. Through your estate planning.)  Indeed, some 80% to 90% of planned gifts are bequests.

For these Donors, the bequest is one of the smartest options.  Leaving a gift by Will permits a Donor to leave a significant gift in the future to benefit the Canadian Medical Foundation all the while providing for their present and future financial security.

As another advantage, if one makes a bequest, a Donor’s estate is entitled to a tax receipt for the full value of the gift, thereby reducing the taxes on the estate that are payable.

Intestacy (Dying without a Will or Estate Plan)

When you die without a Will, you are deemed by law to have died intestate.  Intestacy is an unattractive outcome for most people because the government decides how their estate is to be administered.  The law divides the intestate’s estate and thereby determines how much each of one’s heirs will receive.  Charity receives nothing.  For most people, the government having that complete control over the division of their assets is unacceptable.

With a Will, the Donor (in law, called the “Testator”) is provided with a great deal of flexibility.  A significant contribution to the Canadian  Medical Foundation can be made, without the Donor having to sacrifice any financial security during his or her lifetime.

Indeed, a Will allows the Testator to make his or her own decisions, among other things, about the following matters:

  • Who will receive the distributions of his or her estate;
  • The appointment of guardians for minor children; and,
  • The determination of whom will be his or her Executor.

Types of Bequests

The most common types of bequests are the following ones:

  1. A Specific Bequest: With this type of bequest, the Canadian Medical Foundation would receive a specific dollar amount or a stated proportion of the Testator’s estate. (E.g., “I give to the Canadian Medical Foundation…”)
  2. A Contingent Bequest: With this type of bequest, the Canadian Medical Foundation would receive all, or a share, of the Testator’s estate only in the event of the prior death of other named beneficiaries. (E.g., “If my spouse pre-deceases me, then my entire estate – or, one-third of my estate, not to exceed $5,000, etc. – to the CMF…”)
  3. A Residual Bequest: With this type of bequest, the Canadian Medical Foundation would receive all, or a percentage, of the remainder of a donor’s estate after other specific legacies have been fulfilled. (E.g., “I give to the CMF, 5% of the remainder of my estate, to be used at the discretion of the CMF’s board of governance….”)
  4. A Trust Remainder Bequest: With this type of bequest, the CMF would receive all or part of the principal of a trust established in the Will to benefit named beneficiaries, upon the death of those beneficiaries. (E.g., “Upon the death of named beneficiaries receiving income from a trust established herein, all or a part of the remainder of the trust to go to the Canadian Medical Foundation.”)
  5. A Restricted Bequest: Funds are restricted to the use designated. (E.g., “I give $10,000 to support physician health and wellness programs in Canada…”)