Giving at Death: The Receipt That Outlives You

Most people who intend to leave something to a cause never do, and the reason is almost never a change of heart. It is that the intention lived in a conversation rather than in a document, or it lived in a document that named a charity by a name it stopped using in 2009, or it lived in a beneficiary designation that a spouse’s later change quietly overrode. Meanwhile, giving at death is one of the few decisions in estate planning where doing the thing you wanted to do anyway also reduces what your family pays in tax, sometimes substantially, because death is often the largest single year of reported income a person ever has. This article covers the routes a gift can take, the one distinction that is worth more than all the others put together, and the ordinary administrative failures that stop intended gifts from arriving.

Why a gift at death is worth more than it looks

The year of death is frequently the largest income year of a person’s life on paper. Registered accounts are brought into income where no rollover applies. Capital property is treated as disposed of, so accrued gains are realised. A lifetime of deferral arrives at once.

A donation credit is worth more when it is applied against income taxed at high rates, which is exactly the situation the final return often presents. That is the arithmetic behind the observation that a gift at death frequently costs the family far less than its face value.

The rules also provide flexibility about where the credit lands. A gift made by will or by designation can generally be applied in the year of death and, within limits, carried back to the preceding year, and in defined circumstances claimed in the estate’s own returns. Those limits and the mechanics belong with a qualified tax professional, and the reason they matter is that a large gift and a poorly chosen return can leave part of the credit unused.

None of that is a reason to give. It is a reason to structure a gift you already intend to make so that it does what you meant it to do.

The routes a gift can take

A gift in the will is the familiar route. It is flexible, it can be changed by changing the will, and it can be expressed as a fixed amount or as a share of the residue. Its drawback is that it passes through the estate, which means it is subject to whatever delay and cost the estate faces, and it is visible to anyone entitled to see the will.

Naming a charity as the beneficiary of a life insurance policy sends the money directly, outside the estate, usually quickly, and it produces a gift larger than the premiums paid, which is the reason many people who cannot give a large amount from savings can give a large amount this way. Whether the credit arises in the year of death or during lifetime depends on how the arrangement is structured, and specifically on whether the charity is the beneficiary or the owner of the policy. That distinction is genuinely technical and it determines when the tax relief is received.

Naming a charity as the beneficiary of a registered account is a route that suits a particular situation well: an account that would otherwise be brought into income in full. The account is the taxable item and the gift is the credit, and where they are matched the two can substantially offset. Whether designations of this kind are available depends on the province, which is one of several reasons this needs local advice.

And transferring an existing policy to a charity during lifetime is a different decision again: it is irrevocable, and it produces relief on a different timetable. It suits a person who holds a policy they no longer need for its original purpose.

The distinction worth more than the rest

If one thing on this page is worth acting on, it is this. Donating publicly traded securities in kind, transferring the shares themselves to the charity, is treated differently from selling those securities and donating the proceeds. The distinction concerns how the accrued gain on the donated securities is treated, and it is favourable.

The consequence is practical and it is easy to get wrong. Once the securities are sold, the opportunity is gone, and the sale is irreversible. An executor who liquidates a portfolio and then writes a cheque to a charity has produced a materially worse outcome than one who transferred the shares, and has done so while following an instruction in the will to the letter.

That is why the instruction in the will matters as much as the intention. A will that says a fixed sum of money goes to a charity invites the executor to sell something and write a cheque. A will drafted with this in mind can permit or direct a gift in kind, and the drafting is a lawyer or notary’s work.

The same idea applies during lifetime and is worth mentioning because it is the more common case: a person who gives annually and holds appreciated securities is often better served giving the securities than the cash. That is a conversation with a qualified tax professional, and it is one of the most reliably useful conversations available on this subject.

The ordinary failures that stop gifts from arriving

Naming the charity wrongly is first and it is astonishingly common. Charities merge, rename, wind up, and operate under trade names that differ from their registered names. A gift to an organisation that no longer exists under that name produces a legal question rather than a donation, and resolving it costs the estate money that was meant for the cause.

The remedy is to use the registered name and the registration number of the charity, which are public, and to consider adding a provision for what happens if the charity no longer exists at the relevant time.

The second is a designation nobody knows about. A charity named as beneficiary of a policy has no way of knowing, and no way of claiming, unless somebody tells them or unless the executor finds the policy. Telling the charity is optional and telling the executor is not.

The third is a stale designation. A beneficiary designation made years ago overrides the will as to that asset, and a will written later that mentions a charity does not change a designation on a policy. Where both exist and say different things, the designation usually governs the policy and the family discovers the conflict at the worst time.

And the fourth is failing to tell the family. A gift that surprises the children in the reading of a will is a gift that sometimes gets challenged, and the challenge is usually about not having been told rather than about the money. Saying it out loud in advance, once, prevents almost all of that.

Making the intention real, in the right order

Decide the cause and the amount or the share, and decide whether it is fixed or proportional. A fixed amount in a small estate can consume a much larger share than intended if the estate turns out smaller than expected; a share of the residue moves with the estate.

Get the charity’s registered name and registration number, and use them. Ask the charity whether they have preferred wording, because most established ones do and it costs nothing to use it.

Choose the route with the tax professional, because the choice between a gift in the will, a policy designation and a registered account designation is a tax question with a real answer for your circumstances.

Have the lawyer or notary draft it, including the gift in kind question and what happens if the charity ceases to exist. And then tell the executor where everything is, and tell the family what you have done. The gift that arrives is the one somebody knew about.

The gift a charity may not be able to take

Everything above assumes the charity can accept what is left to it. Where the gift is money, listed securities or a policy benefit, it generally can. Where it is real property, private company shares, art or equipment, it may not.

A charity that accepts property has to value it, hold it, insure it and sell it, and a small organisation may have no capacity for any of that. Most established ones have a gift acceptance policy and may decline, and a refused gift falls back into the estate and goes to whoever takes the residue.

The remedy is one call and one clause: ask the charity in advance whether it would accept what you have in mind, and have the lawyer or notary provide for what happens if it does not. Valuing property in a way the tax authorities accept is work for a qualified tax professional.

The estate’s own status, and the clock it runs on

The flexibility described earlier, about which return the credit can be applied against, is not a permanent feature of every estate. It depends on conditions in the tax legislation, on a status that lasts only a defined period after the death, and on the gift being made within a period the legislation also defines.

So an estate that drifts, a property that takes years to sell or a disagreement that stalls everything can push the transfer past the point where the most useful choices remain. The charity still receives the gift; what is lost is the choice of where the credit is claimed.

The executor is therefore part of the plan. Name someone who will act and ask them to raise the timing with the estate’s tax professional at the start.

Frequently Asked Questions

Continue Learning

Read The Final Tax Return at Death for the return a credit lands on, Naming a Beneficiary for how a designation works, and The Estate Planning Checklist for where this belongs in the sequence. The Succession Planning guide sets out the whole picture.