Considering leaving a legacy gift to McGill? Designating a charity as a beneficiary of your qualified retirement plan can be a tax-smart and effective solution.
“There can be significant tax advantages to donating retirement assets,” says Marilyn Piccini Roy, Ad. E., LLB’82, BCL’83. A partner at Robinson Sheppard Shapiro LLP, Piccini Roy is recognized as a leading lawyer in trusts and estates, wealth management and tax planning.
For more on donating retirement plan assets – either during your lifetime or in your estate plan – and avoiding potential pitfalls, Piccini Roy is sharing her insights below.
Not offering any advice or opinion
Through this “Leaving a legacy: U.S. Bequests” article, McGill University, along with the presenter concerned, offer general information (the “Information”) only. The Information is not intended as legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. While the Information presented here is believed to be factual and current, it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect those of the individual presenter concerned and are subject to change. Opinions expressed in this article are those of the interviewee and do not necessarily reflect those of McGill University or its members.
Are there any benefits to donating retirement plan assets to charity during your lifetime?
While a common estate planning technique is to provide for a charitable donation through retirement plans such as RRSPs, RRIFs, LIRAs and LIFs, the opportunity to donate these assets in one’s lifetime is often overlooked.
Some people may have amassed considerable amounts (especially in RRSPs or RRIFs) that they may not need at a certain age, given the other assets they own. Potential donors of RRSPs or RRIFs are deterred from making a philanthropic impact during their lifetime because of perceived complexities and the fear of high taxes. But they can achieve an immediate impact without triggering tax, provided the donation is carefully planned.
RRSP/RRIF tax rules do allow for withdrawals from the plan, but upon withdrawal, the financial institution holding the RRSP/RRIF assets is required to withhold certain amounts, which vary depending on the amount withdrawn. The full amount of the withdrawal is included in the owner’s taxable income and is taxed at the owner’s marginal rate. If the amount withdrawn is donated to a registered charity, a donation tax receipt will be issued, resulting in a charitable credit that offsets the tax on the withdrawal.
For larger donations, it is possible to avoid withholding tax on the RRSP/RRIF withdrawal by filing a special tax form for approval from the Canada Revenue Agency (CRA). Not only do donors derive tax benefits during their lifetimes, but their estates will be left with fewer RRSP or RRIF assets that will attract tax at death.
Are there any benefits to donating retirement assets to a charity or organization such as McGill through your estate plans?
There can be significant tax advantages to donating retirement assets to McGill as part of an estate plan. Potential benefits include:
- Neither you, your heirs, nor your estate will pay income taxes on the distribution of the assets
- Your estate will need to include the value of the assets as part of the gross estate, but it will receive a tax deduction for the charitable contribution which can be used to offset the estate taxes
- Because charities do not pay income tax, the full amount of your retirement account will directly benefit the charity of your choice
- It’s possible to divide your retirement assets between charities and heirs according to any percentages you choose
- You have the opportunity to support a cause you care about as part of your legacy.
Who is the ideal candidate for gifting retirement plan assets to charity through their estate?
For many people, retirement accounts may be the most significant source of assets accumulated during their lifetime.
Others may find that, due to their resources and investments, they are not in need of all the funds accumulated in their retirement accounts. Others may be widows, widowers or single persons who have no close family members. These are all ideal candidates for charitable gifts through their estate. A direct contribution of retirement assets to charity as part of an estate planning strategy can be very tax efficient. It can mean more funds for charities and heirs alike.
Are there any pitfalls to be avoided when considering making a gift of retirement assets through an estate?
Yes, there are pitfalls to be avoided.
A benefit of charitable giving is the tax receipt. When the donation is made at death, 100% of the donation can be used to offset income received or deemed to be received at death. For example, the “deemed disposition rule” at death results in a mandatory inclusion in taxable income of the value of an RRSP or RRIF owned at death, except if rolled over to a spouse or other qualified individual.
Be aware that CRA will not recognize a charitable tax receipt unless the charity is registered with its Charities Directorate. You or your estate planner should ensure your intended charity is registered, which is easily done online. (Note: McGill is listed as ‘Royal Institution for the Advancement of Learning McGill University.’)
A problem may arise if your designated charity later changes its name, amalgamates with another charity, or loses its charitable status. This could result in the failure or lapse of your legacy gift. If you become aware of any of these events, you should change your will, especially if your will does not contain a default clause covering these events.
Sometimes you may wish to place conditions on the gift to the charity. For example, it may be important to you to ensure that the University has particular equipment or services, or to encourage a minority group to attain higher education. While such conditions may have great attraction when you are planning or making the gift, there can be difficulties implementing them in the future. The University may have obtained sufficient funding from other sources for the equipment or services, or the minority group may no longer have a need when the gift is received; the charity is then left with funds that cannot be effectively used. A better approach is to direct that the gift be used for your desired purpose, but to include an “out” which permits the charity to use the gift for another purpose in the event that the desired purpose is already satisfied. (See ‘Safety language’ on the Suggested Bequest Language page.)
How do you make McGill University the beneficiary of retirement plan assets?
A donor may also wish to donate his or her RRSP or RRIF upon death. There are two ways to do this.
One way is to gift the RRSP to McGill in your will. The other way is to make use of the direct beneficiary election, which is signed when the RRSP is first opened and can usually be changed whenever desirable.
If the first method is used, the RRSP will fall into the donor's general estate before passing on to the charity. Under the second method, the RRSP will automatically become the property of the charity without going through the estate. The advantage of the second method is that the RRSP will not be subject to probate. When a will is probated, the various provinces (except Quebec) charge different amounts of tax on the total value of assets bequeathed in the will. Thus, the amount of money in an RRSP is added to other assets, and a portion is taken by the government before any of the assets are transferred.
Is it correct that in Quebec the designated beneficiary must also be named in a will, but outside Quebec it can be dealt with outside the will? What exactly does this mean?
This is partly correct. In Quebec, it is possible to directly designate a beneficiary of an RRSP or RRIF if the retirement plan qualifies as a fixed-term annuity. Typically, this type of RRSP or RRIF is provided by an insurance company.
A direct beneficiary designation for this type of RRSP or RRIF may take two forms: one is on the beneficiary designation form available from the insurance company or plan administrator; the second is in writing (which may include a will), which must expressly contain details about the specific RRSP or RRIF, such as the issuer and account or plan number.
If the RRSP or RRIF is not structured as a fixed-term annuity or a trust, a direct beneficiary designation is not possible under the laws of Quebec. In fact, most RRSPs and RRIFs are contracts of deposit, and any purported beneficiary designation is invalid. For this reason, it is customary and advisable to bequeath the proceeds of retirement plans such as RRSPs and RRIFs to a legatee in a will. This is not a beneficiary designation, but a legacy gift.
If a charity is named as one of the beneficiaries of a retirement asset, is this revocable?
If a charity is designated as a beneficiary, it is a revocable designation unless it is expressly stipulated as being irrevocable. If an RRSP or RRIF is gifted to a charity in a will, the gift may be revoked at any time by the testator, provided the testator is capable.
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