Bill Gates, co-founder of Microsoft and one of the world’s richest men, is also well known for his plan to give most of his fortune away to charity in his will, rather than leave it all to his children. Obviously, there’s not one person who can say their situation is anything like Gates’, but there are plenty of people who have achieved financial security within their lifetime who wish to will some of their estate to a charitable organization or to leave a legacy as it’s commonly referred to. In Gates’ case, he believes his children should have to make their own way (although he does admit they won’t ever have to live “poorly”). There are some other reasons, however, that a person may want to make a donation when their time of passing comes, like the potential for significant tax savings.
In 2016, the regulations around charitable donations made at the time of a person’s death changed. Instead of these donations being deemed as being made immediately before an individual’s death, donations indicated in the will and designated donations are now deemed to have been made by the estate at the time at which the donation is transferred to a qualified donee. Graduated Rate Estate (GRE) donations benefit from added flexibility since they give an estate more time to make charitable donations as well as allow for a capital gains exemption for donations of certain properties. An estate’s legal representative can choose to allocate GRE donations among any of the following:
- the taxation year of the estate in which the donation is made,
- an earlier taxation year of the estate, or
- the last two taxation years of the deceased individual.
In other words, a donation in your will can be allocated between your final personal tax return, your tax return for the year prior to death, or a combination if the donation was made within 36 months of death and your estate meets certain criteria.
How Much is Too Much?
Leaving a donation to a charity can give your estate donation tax credits, which can help to offset taxes owing on an estate, making things a little easier for your loved ones. However, if you are making large donations, there can be a point where your estate may not see the full benefit since an individual can only claim up to 75% of their net income as a donation.
Be Careful of Specifying Amounts
The problem with specifying the amount to be a bequest is that you must make sure your estate has that amount of money left in it. The other issue that could arise is that, if after all of the distributions have been made, there may not be enough money left over to adequately cover everything in your will.
It’s also important to review the Canada Revenue Agency (CRA) list of charities and other qualified donees, to make sure your charity of choice can issue official donation receipts.
Regardless of whether or not you plan on making a donation to a charitable organization, you should always make sure to keep your will up-to-date. At JMH&CO, we recommend reviewing your will every three to five years or whenever there is a significant change to your situation such as new family members, for example.