Financial planning corner.

Answer:

Whether you plan through your estate or gift during your lifetime, there are many ways to give, including:

Via your Estate:

• Bequest — a gift made through your will or trust;
• Beneficiary designation — name a charity as the beneficiary of your life insurance policy, RRSP or RRIF, or other assets allowing a beneficiary designation.

During your lifetime:

• Charitable donation of money — donate to charity one-time or annually. Can carry-forward donation receipts for up to 4 years (after year of donation), as well as pool receipts for yourself and your spouse, to accumulate receipts to claim on your tax return, potentially receive a higher tax credit;
• Charitable Remainder Trust — contribute assets to a trust now with the charity named as the capital beneficiary, receive an immediate tax benefit and lifetime income stream – remaining balance upon your death is paid to the charity;
• Charitable Gift Annuity — combines lifetime income stream for annuitant (i.e. you) and a death benefit to your charity. Charitable donation receipt is given upfront, provides an immediate tax benefit;
• Publicly-traded securities, real estate, private company shares, personal property — immediate tax benefits;
• Gift of future interest in real estate — gift your residence, vacation home, or other real estate to a charity and continue to occupy and use the property during your life. You are treated as the owner of the property but will receive an immediate tax credit.

Resources to help with gift planning:

• Vancity Community Foundation can meet with you to discuss donation opportunities (such as to a named fund);
• An experienced estate planning lawyer can help with your questions; Your wealth management professional can work with Vancity’s Financial Planning Department to create an estate and/or retirement plan which includes potential charitable bequests.

Trends to note:

• Several recent court cases have highlighted the risk for estate litigation,when a charity has been named beneficiary in a will (for either the “residue” of an estate, or a percentage of the residue). Essentially, the charity may argue that more assets should be included in the estate (rather than flowing for example, to a joint account holder), or that individual assets should be revalued.
• If gifting to charity through your estate, discuss techniques with your estate planning lawyer, including any appropriate techniques to reduce risk of litigation by a charity. Discussion points may include, but are not necessarily limited to:
  • gifting only a specific asset (such as an automobile, or financial account) to charity, rather than part or all of the estate residue; or,
  • specifying a dollar value gift to charity (e.g. $10,000) rather than a percentage of an asset or the estate; or,
  • making a gift while you are alive, rather than through your will.
• By reducing a charity’s motivation to question overall estate or individual asset values, you may facilitate a quicker settlement of your estate, so your intended beneficiaries can receive their share faster and with less legal/administrative costs.

Question:
What are some tax implications around my making an RRSP or RRIF beneficiary designation?

Answer:

Naming your Spouse as the sole beneficiary:

• this applies to naming your common law or same sex spouse too;
• a tax-free rollover is possible when you (the plan holder) die:
  • RRSP/RRIF is directly transferred to your spouse’s plan on a tax-deferred basis, by the end of the year following the year of death;
  • saves immediate tax to your estate.

Naming your Spouse as RRIF’s successor annuitant:

• your spouse simply becomes entitled to payments from your existing RRIF (assets not cashed out and transferred);
• therefore no immediate tax for your estate;
• for Vancity RRIFs, your spouse automatically is considered your successor annuitant, if you named them sole beneficiary of your RRIF.

Naming your financially dependent child/grandchild as RRSP/RRIF beneficiary:

• to be financially dependent requires your child/grandchild:
  • to ordinarily reside with you (unless they were away from home attending school);
  • to earn for the previous year less than the unreduced maximum Basic Personal Amount; or, if financially dependent due to mental or physical infirmity, less than the unreduced maximum Basic Personal Amount plus the Disability Amount;
• If these financially conditions are met, the RRSP/RRIF amount is included in your child’s or grandchild’s income^ (instead of yours);
• if under age 18, your child/grandchild can use your RRSP/RRIF funds to buy an annuity to age 18 held by themselves (or in a trust where the minor child is the sole beneficiary);
  • the annuity income is taxed as your child’s income (or the trust’s income), as received, so the tax is spread out until they reach age 18;
• If financially dependent by reason of mental or physical infirmity:
  • regardless of age, they can defer tax by transferring funds directly to an RRSP, RRIF, eligible annuity, or RDSP* for themselves;
  • if a mentally infirm beneficiary, could have the annuity income paid into a lifetime benefit trust, or rolling into an RDSP*;
  • see related article Leave RRSP/RRIF to infirm dependent for more details, including transferring the RRSP or RRIF to an RDSP*.

Other named RRSP/RRIF beneficiary:

• applies to anyone else you name as an RRSP/RRIF beneficiary, who does not meet the conditions above;
• your RRSP proceeds will be included on your final income tax return as taxable income**;
• your estate is primarily liable for tax payment (not your designated beneficiary^);
• if your estate cannot pay the required taxes due to lack of funds, Canada Revenue Agency (CRA) will require your beneficiary to pay the taxes.

Any beneficiary:

• if a beneficiary was designated appropriately either on the plan documents or in your will, probate fees may not apply to the value of your RRSP or RRIF;
• courts may apply a “presumption of resulting trust” to consider that your beneficiary (adult children) is holding the RRSP/RRIF assets ‘in trust’ for other persons, such as beneficiaries in your estate; discuss carefully with your estate planning lawyer how to clarify who should inherit your RRSPs or RRIFs^. Discuss with your estate planning lawyer how to clarify who should inherit your RRSPs or RRIFs^{^}.

^In a recent court decision (Morrison), the court indicates that a “presumption of resulting trust” may be increasingly assumed where the named RRSP/RRIF/LIF beneficiary is an adult child of the annuitant. This could impact who ultimately receives proceeds from an RRSP/RRIF/LIF and whether the beneficiary(ies) or the estate are held liable for the tax on the proceeds.
* 2010 Federal budget allows RRSP/RRIF proceeds from individuals passing away on or after March 4, 2010 to be rolled over to their financially dependent infirm child’s (or grandchild’s) RDSP, under certain conditions.
** The 2009 Federal Budget allows carrying back of any post-death decreases in value of an RRSP/RRIF and deducting against planholder’s RRSP/RRIF income included in the year of death.

Here’s a chart showing some of these options:

Visit CRA or Advisor.ca for more information.

The response set out above is for your information only and is based on general assumptions and the facts presented to Vancity. While our goal is to offer current, accurate and clearly expressed information, Vancity does not warrant the accuracy, adequacy or timeliness of this information. Changes to the assumptions or facts or to any applicable laws or regulations could affect the validity of this information. The information is not intended to be investment, legal, accounting, tax or other advice and you should not rely on it without seeking the advice of professional advisors to ensure your particular circumstances are properly considered. Vancity is not responsible for loss or damage that results from reliance on this information.

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