How you can have your cake and eat it too!
Senior Trust Officer
Solus Trust Company Limited
Our clients, Mr. and Mrs. B, were looking to simplify their financial affairs. Their pensions were more than ample to cover their day to day expenses, and there was a healthy RRIF to cover the possible need for increased care expenses. Without children of their own, they were very engaged with their local athletic club and wanted to investigate ways to benefit the young members of the club.
Their financial advisor suggested setting up a donor advised fund to provide annual scholarships to young club members. In 2013, they donated $426,095 to establish the fund. In early 2014, Mr. and Mrs. B presented the first scholarship to a thrilled child.
The B’s were also thrilled when their tax returns for 2013 were prepared and there was no tax to pay – in fact, Mr. B. received back all of his tax installment payments. The unused charitable donations were carried forward, and the necessary amounts were used to eliminate the tax owing for the next four years. When Mrs. B. passed away in 2016, there were even enough donations available to offset the extraordinary increase in Mr. B’s income in that year.
Mr. B. passed away in 2018, leaving an estate valued at $782,000, with the bulk ($650,000) held in a RRIF. His will gifted 75% of the estate residue to the donor advised fund, with the rest going to a favored nephew.
The tax liability from this disposition could have been significant. However, due to the donation made in the will, the estate won’t pay any tax and more will be distributed to the intended recipients.
The following table demonstrates the tax savings on the final tax return and the increased amounts available to be distributed to the beneficiaries. Please note that this example has been simplified for effect!
Tax Savings to Estate on Terminal T1
|With Gift by Will||Without Gift by Will|
|Value of Estate||$782,000.00||$782,000.00|
|Tax Payable||$ -||$264,481.72|
|Net Distributable Estate||$752,000.00||$487,518.28|
|To Family (25%)||$188,000.00||$121,879.57|
|To Charity (75%)||$564,000.00||$365,638.71|
Mr. and Mrs. B were successful in their financial goals and their estate plan. They were able to enjoy the benefits of their charitable gift and ensure that their final wishes were achieved.