Bequest for nieces and nephews

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Diogenes
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Re: Bequest for nieces and nephews

Post by Diogenes »

Again, many thanks for the comments. Much food for thought here.

Regards buying everybody a vacation the fundamental problem is that, with only a small pension and current good health, the capital can not be spent unless it is to buy an annuity. Thus, a surprise "run over by a dump truck" event leaves a large portfolio.

A charitable donation would help with tax planning, so will almost certainly be included.
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Re: Bequest for nieces and nephews

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Let us suppose that,instead of fixed bequests, percentages are assigned, including charitable donations.

How does the executor handle the problem that the final amount of the estate, including charitable donations, is not known until the tax return is accepted, and the final tax is not known until the charitable donations have been made?
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Re: Bequest for nieces and nephews

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Diogenes wrote:Let us suppose that,instead of fixed bequests, percentages are assigned, including charitable donations.

How does the executor handle the problem that the final amount of the estate, including charitable donations, is not known until the tax return is accepted, and the final tax is not known until the charitable donations have been made?
I think donations would be applied against the year of death return and be applied against the cap gains and other income attributed to the deceased. So after death the estate would have interest and dividend income to the extent assets reside in the estate (trust) prior to distribution to the beneficiaries including the charities.
Last edited by SQRT on 07 Feb 2013 19:44, edited 1 time in total.
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Re: Bequest for nieces and nephews

Post by Peculiar_Investor »

Let me add another welcome to Diogenes joining the posting side of the FWF community.

Since the OP has lurked before posting, they may have already seen references to Sandra E. Foster's excellent Canadian book on the subject, You Can't Take it With You, Common-Sense Estate Planning for Canadians. I'd strongly recommend reading it if you haven't already.
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Re: Bequest for nieces and nephews

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Diogenes wrote:Let us suppose that,instead of fixed bequests, percentages are assigned, including charitable donations.

How does the executor handle the problem that the final amount of the estate, including charitable donations, is not known until the tax return is accepted, and the final tax is not known until the charitable donations have been made?
Use the estimated taxes, as per the return filed.

Most executors hold back an amount of the estate as a buffer against reassessment by CRA, and so pay out only a part of the estate (according to the percentages in this case). They do not make a final distribution until CRA issues a Clearance Certificate. Executors don't have to do this, but then they are on the hook for any extra taxes, so most do.

If CRA amends the tax return, simply adjust the final distributions.

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Re: Bequest for nieces and nephews

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Use the estimated taxes, as per the return filed.

Most executors hold back an amount of the estate as a buffer against reassessment by CRA, and so pay out only a part of the estate (according to the percentages in this case). They do not make a final distribution until CRA issues a Clearance Certificate. Executors don't have to do this, but then they are on the hook for any extra taxes, so most do.

If CRA amends the tax return, simply adjust the final distributions.
Yes, but that doesn't really clear the circular calculation problem, unless it is the non-charitable bequests only that are withheld. If some of the charitable bequests are also withheld - which would be fairer - the receipts would not be available for the filing, so some of the donation credit would be lost.

ISTM that a percentage donation to charities thus suffers from tax credit imperfection.
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Re: Bequest for nieces and nephews

Post by SQRT »

I think you would normally pay the charities first, taxes next, remainder to residual beneficiaries. I would think the charity bequest would usually be a fixed dollar amount to prevent circularity.
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Re: Bequest for nieces and nephews

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Note that unused charitable donations in the year of death can be carried back to the previous year:

Charitable tax credits flexible after death | Advisor.ca
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Re: Bequest for nieces and nephews

Post by OhGreatGuru »

It's your money. You may do what you want with it. And I can't answer for the financial circumstances of your nieces & nephews. However given your age and life expectancy you might consider skipping generation and making bequests to the children of your nieces and nephews instead. I had an aunt an uncle who did this.

As others have suggested, and as you are already considering, I would think making specific bequests of a size you think is appropriate, and then sending the residue to 1 or more charities after all taxes, costs, etc. are settled would be easier for the executor. (otherwise all the beneficiaries have an interest in seeing a final statement of accounts before signing a release form.)
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Re: Bequest for nieces and nephews

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OhGreatGuru wrote:I would think making specific bequests of a size you think is appropriate, and then sending the residue to 1 or more charities after all taxes, costs, etc. are settled would be easier for the executor.
The OP is worried that, going this route, it will be difficult to claim tax credits for the gifts to the residual charities. I suppose you can not claim on the initial filing, then if the initial filing is approved by CRA, make the donations to the charities, get the receipts, and file amendments to the returns to get the credits. When the new credits are received, give those to the charities, get additional receipts, and iterate.

Not sure this is easy on the executor.

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Re: Bequest for nieces and nephews

Post by Shakespeare »

Not sure this is easy on the executor.
Doesn't appear to be.

Another route, suggested by reading the Advisor's Edge paper I linked, is to overgive to charity such that the tax is zero. (And previous year's tax: not sure if you have to file a T1Adj for the previous year or CRA would do it automatically). Given the OP has no spouse, this wastes some of the tax credits, though.
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Re: Bequest for nieces and nephews

Post by Pickles »

The OP is wrestling with how to determine, in advance, how much money his investments will amount to at time of death so that he can apportion his estate between family members and charities according to his wishes. He points out that, aside from his investments, he has only a small pension. We are working with little info provided (not even the number of nieces and nephews or whether the estate will have large capital gains to pay tax on).

One option that comes to mind is getting an annuity through a charity with some of the money. As I understand it, you arrange to buy an annuity insured with the charity as beneficiary. You receive the income from the annuity while you live and the charity gets a lump sum when you die.

This would then enable you to know exactly how much you are giving the charity, to give it now so it can start doing good in your lifetime, to increase your income and decrease your taxes, now and at death and to know how much is left in your investment account to divide among your nieces and nephews in your will, .

I don't know much about these Do your own due diligence. Here's a link to get you started:
http://www.charitableannuities.org/cont ... -annuities
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Re: Bequest for nieces and nephews

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Thank you for the additional comments. There would indeed be a large tax bill on death as the portfolio now stands. A significant charitable donation (about half the estate as of now) would be needed to offset it.
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Re: Bequest for nieces and nephews

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Diogenes wrote:Thank you for the additional comments. There would indeed be a large tax bill on death as the portfolio now stands. A significant charitable donation (about half the estate as of now) would be needed to offset it.
You would have to verify this -- or maybe another member with knowledge of income tax rules can chime in -- but I think that any investments used to finance the charity's annuity would not be subject to a capital gains tax, similar to the situation where one donates shares to a charity: you avoid tax on the capital gains and get a tax credit for the entire donation. So you may not need as large a donation as you think to offset tax. The strategy (assuming I am right about the tax rule) would be to donate the investments with the greatest gain and hold back the others to be cashed in and distributed to family members, in accordance with your will.
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Re: Bequest for nieces and nephews

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Thank you. The tax situation arises because, although I have a small pension, I have a large LIRA from a DC plan conversion and some fortunate investment decisions. Although I have unlocked the LIRA to the maximum extent possible, a large tax bill due to deemed disposition is inevitable, unless I buy an annuity with those funds - and I'm too young for that.

I used online calculators to estimate the tax due should I die overnight and CRA's estimator CRA - Donations and donors - Tax savings - Charitable donation tax credit estimator to calculate the size of charitable gift needed in the will.
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Re: Bequest for nieces and nephews

Post by Shakespeare »

Diogenes wrote: a large tax bill due to deemed disposition is inevitable, unless I buy an annuity with those funds - and I'm too young for that.
You should perhaps read the following:

Terminal Tax Returns (pdf)

In particular:
pdf wrote:Withholding Tax (s. 153(1) (1) of the Act; Regulations 100(1) (j); (103(6) (d.1))
There is no requirement to withhold the remittance of tax when a taxpayer's RRSP or
RRIF is paid out after death to a named beneficiary or to his or her estate. The Act only
requires that tax be withheld during the lifetime of the annuitant. Plan administrators
may not be aware of this distinction.
So the executor could request that no tax be withheld, thus allowing the charitable donations to be made without triggering a refund/more charitable donations/adjustment/refund cycle.
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Re: Bequest for nieces and nephews

Post by twa2w »

Depending on the type of assets held, the OP could consider a charitable remainder trust for some portion of the money, if the assets are large enough. He may be too young at this point and if the assets are in a Registered product it is less favourable.
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Re: Bequest for nieces and nephews

Post by Thorn »

Given sufficient funds and time, I favor the experimental approach. Starting soon, give them each (say) $10K a year and see what they do with it, perhaps for 2 or 3 years. If they seem to be clueless, a little discussion about future gifts might be in order.

If you have an excess of income each year without touching your capital, this allows you to avoid the complications of probate. In fact if you have the luxury of realizing that death is close, liquidating assets and writing checks to avoid government interference and family in-fighting over a large estate might be a good way to go.

Obviously the larger the estate the more need for a tax accountant to provide specific advice.
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