Timing Your Charitable Gifts: 3 periods in your life when you can give to charities

Many people give to charities because they believe in their mission, while others give to charities because they want to contribute to their communities. No matter their motivation for giving, many people who give to charities rarely plan their charitable gifts or consider the tax implications of giving. A charitable gift that is unplanned can lead to adverse tax consequences, such as the inability to fully use the potential tax savings.

One way of planning your charitable gift, is to think about when you will give to a charity. This blog summarizes the impact of giving during 3 different periods of your life: (i) while you are alive; (ii) after you die; or (iii) while you are alive and after you die.

Giving while you are alive

Many people often give to their favorite charities while they are alive because they want the charities to put their gifts to use right away so that they can see their gifts at work. They often make a one-time gift to a charity or make several gifts to one or more charities during their lives.

• Give outright

This type of giving is often less complex, although the substance of your gift and the conditions, if any, that you place on the charities regarding how they must use your gift will influence the complexity of your gift. One downside of this type of gift is that if the value of your gift is considerable, you may not be able to use all the tax credits that your gift generates in the year of the gift and the ensuing five years generally or ten years for donations of culturally or ecologically sensitive gifts specifically.

• Give through a Pledge

If the gift you wish to make is significant, you should consider breaking up your gift over several years. Doing so would allow you to extend the income tax benefits of your gift beyond the year of your gift plus the general five-year carry-forward period. If you choose to break your gift into installments, you could choose to make multiple gifts over time as you choose, or you can enter into a written pledge agreement with the charity where you pledge to make certain future payments to the charity. In such case, you should discuss with your legal and tax advisors whether the pledge agreement is legally binding on you or your estate.

Giving after you die

Some people choose to give to charity after they die. Some do so because they or their families need the property that is the subject of the gift while they are alive. Others do so as part of their tax or estate plan to reduce the taxes that their estate will pay at death.

• Give through your estate

If you wish to give after you die, you can direct the executors of your estate to make a charitable gift after you die. You can direct that your gift be in the form of cash, a specific property, or a share of your estate. You can also give your executors instructions on when they should make the gift, For example, you can direct your executors to: (i) make the gift right after you die, (ii) defer your gift until a loved one who is a beneficiary of your estate (i.e. your spouse or child) dies, or (iii) defer your gift until an event you specify in your will happens. Your direction as to when your executors should make your gift may produce different tax results and you should discuss the potential tax implications of your gift with your legal and tax advisors.

• Give using your life Insurance, RRSPs and RRIFs

As discussed in my earlier blog, you can use beneficiary designations under life insurance policies or registered plans such as RRSPs or RRIFs to make a charitable gift on your death.

Giving while you are alive and after you die

Many people not only choose to give to their favorite charities while they alive, but also after they die.

• Give through a Charitable Remainder Trust

One way of giving to your favorite charities while you are still alive and after you die, is by making your gift through a “charitable remainder trust.” A charitable remainder trust is a trust that must distribute all or a portion of the remaining trust assets to a charity when the trust terminates. To qualify as a charitable remainder trust, the trust document must specify that your gift to the charity is irrevocable and the trustees of the trust cannot encroach on the capital of the trust prior to distributing the trust capital to the charity. If you create this type of trust while you are alive, the charity will issue a donation tax receipt to you. If you create the trust as a consequence of your death (i.e. through your will or via a beneficiary designation), the charity will issue the donation tax credit to your executor for use in your terminal tax return.

• Give through Alter Ego or Joint Partner Trusts

If you want to give a portion of your estate to a charity while you are alive and on also on your death, but you want to ensure that your assets are available for your care and benefit while you are alive, you may use an alter ego or joint partner trust as a vehicle for charitable giving. The assets you transmit through such a trust do not form part of your estate or your spouse’s estate and can be given to a charity without obtaining probate. Additionally, the details of your charitable gift will remain private as compared to a gift you make in your wills. There are special tax rules that apply to creating these types of trusts (i.e. you must be at least 65 years of age to create this trust) and making a gift through them. For example, if you make a charitable gift through an alter ego or a joint partner trust, the charity can only issue the tax receipt to the trust. The tax receipt cannot be used in your terminal tax return to reduce your personal taxes. You may structure such a trust so that it qualifies as a charitable remainder trust, but that will require that you prohibit any encroachment on the capital of the trust for any beneficiary, including you. You should consult your legal and tax advisors to discuss whether these types of trusts are available to you.

• Give through an Endowment Fund

Another vehicle you can use to make a charitable gift while you are alive and after you die, is an endowment fund. You may create an endowment fund and fund the endowment while you are alive and, on your death. Alternatively, you may also choose to set up the endowment on your death alone by creating it in your will or other estate planning document. An endowed gift allows you to control how a charity uses your gift by imposing certain conditions as to the manner the charity can use your gift or the charitable purposes that the gift can support. You can also use an endowed gift to give a self-sustaining source of funding for your favorite charitable causes. This would involve you giving a large amount of capital to a charity and directing it to use only the income generated by your gift (not the capital) to support its charitable activities and purposes. Although the terms of an endowment can also let a charity encroach on the capital of your gift in certain circumstances.