WEALTH MANAGEMENT – MALCOLM BURROWS

By Malcolm Burrows

I recently spoke to an estate lawyer who told me she would never recommend certain charities to clients. Why? Because of the way these charities treated estate trustees. Some charities are unduly litigious, grind on fees, and are obstreperous about releases. It’s not the first time I’ve heard this comment from estate professionals — and some traumatized lay executors and family members.

Sympathy for Charities

It’s hard to evaluate the validity of these accusations. I have worked at four major charities over the last 32 years. I sympathize with charities and their challenges with estate administration. There are administrative delays, clueless executors, double-dipping lawyers, legal challenges, family dysfunction, and in a few cases, outright fraud.

Major charities that are frequently named in wills typically have experienced estate administrators. They all know each other. When named in the same will, they coordinate on administration and legal matters — partly to reduce costs and partly to provide a united front. They try to be responsible and uphold the testator’s charitable intent. This should be applauded.

Second-Class Beneficiaries

Yet charities are often treated as second-class estate beneficiaries. That is, not family. These interlopers should be grateful for what they receive and not cause trouble. I’ve heard this view repeatedly over the years and actively repudiate it. Individuals have testamentary freedom, which exist in most provinces. Charitable beneficiaries are not only legitimate, but important to society.

Difficult Charities

I do know a few charities that have a reputation for being “difficult” in estate matters. The translation of “difficult” is a charity that asks for clear estate accounts and fee justifications. That’s just being professional.

Nonetheless, some charities get reputations. They use litigation lawyers extensively for routine estate matters and are institutionally hostile to executor fees. One charity has been called “toxic and greedy”. Another serves as executor for their donors to reduce costs, blithely ignoring the conflict of interest.

So-called difficult charities conduct business in a way that erodes trust, or at least that is the perception among estate professionals. Some charities estate administration habits damage their reputation in the community, which could ultimately reduce donations. Charities, however, have a duty to be good fiduciaries and protect charitable property from estates. Done right, the fiduciary obligation outweighs the potential reputational risk.

• • • • • • • • • • • • • • • • • • • • • • • • • • •

 

Illiquid Assets and Estate Donations

 

Tax relief for an estate donation cannot be claimed until the property is transferred to a charity. No tax receipt; no tax credits. If the distribution is after 60 months after death of the donor there is no tax receipt at all. But what if the estate has illiquid assets that can’t easily be monetized, but may, possibly, be transferred in-kind to a charity?

Extended claim period

Formally, the tax rules addressed this issue. When the estate donation rules were first introduced in January 2016, they were aligned with the 36-month graduated rate estate (“GRE”) period. This made the claim period for donations the two final lifetime returns and the three GRE estate returns. Charities were concerned that they would be see the value of estate donations reduced if the claim period was missed. Delays are most often caused by litigation or illiquid assets. The Canadian Association of Gift Planners advocated for post-mortem transfer period to be extended from 36 months to 60 months. Its wish was granted.

Terminal T1 Liability

The extended claim period, however, only addresses part of the issue. It ensures, in most cases, that there will be tax relief for a charitable gift — which means more money for both charitable and human beneficiaries. The biggest tax bill typically falls in the terminal lifetime return. Tax is owing if the return is filed without a donation tax receipt. It may be recovered later after a re-file, but at the very least interest is payable on the amount of tax owing.

In-kind Distributions

Executors may wish to distribute assets in-kind to named registered charities in time for inclusion on the terminal T1. This is a simple matter if the property is public securities. In this case, there is also additional tax savings due to the elimination of the capital gains tax. The issue is messier with property such as private company shares, art collections, rural real estate, and mineral and energy rights. Collectively, these are example of “complex property”.

Complex property is difficult to transfer to charity, especially if there is more than one organization named in the will. Charities typically don’t have the expertise to accept, value and manage complex property. Complex property is also often difficult to divide. More fundamentally, executors traditionally think it is their responsibility to sell property and distribute cash to charity beneficiaries. Charities, the thinking goes, receive donations for immediate use, not undertake a lengthy monetization process — essentially acting as a second executor.

Charities as administrators of complex property

There are situations when these assumptions should be rethought. An estate plan may be structured to name a charity that will play an intermediary, administrative role. They combine this administrative role with carrying out the charitable purposes, either directly or through grants to other registered charities.

Fortunate donors of complex property are those that only naming one charity in their will that is sophisticated in the management of property. Most estate donors typically want to support several charities. Traditionally, private foundations have be used to serve this function for estates with complex property. Unfortunately, there are restrictions related to gifts of private shares to private foundations that create planning challenges.

Public foundations

More recently, certain public foundations with donor advised funds are acting as both recipient and administrator of complex property. Public foundations will typically be more able to accept and receipt private company shares than private foundations.

Again, it depends on the capacity of receiving public foundation. A charity that receives an estate donation of private company shares becomes a shareholder of the company. It’s not just a tax plan, but a multi-year relationship. Trust, experience, and governance are needed. When a foundation has this capacity, the tax and planning issues can be addressed. When absent, it is best for the executor to pay CRA interest charges and push to monetize assets within estate.

 

 Malcolm Burrows is a philanthropic advisor with 30 years of experience. He is head, philanthropic advisory services at Scotia Wealth Management and founder of Aqueduct Foundation. Views are his own. malcolm.burrows@scotiawealth.com. He writes this column exclusively for each issue of Foundation Magazine.