Leaving a Legacy - Charitable Bequests

By: Patricia MacCallum-Lord, LL.B., TEP. Senior Will & Estate Planner, Financial & Estate Planning, Scotiabank

A Will is a legal document that expresses wishes regarding the distribution of the owner’s property following death. As such, it is an opportunity to financially recognize family, friends, and community.

A Will can also include alternate beneficiaries in case the first named beneficiaries fail to survive or otherwise are disqualified from inheritance. Dying without a Will means the ability to express such wishes is not exercised. In the absence of a Will, provincial legislation dictates the distribution of the estate based solely on the relationship/kinship individuals had with the deceased (e.g. legal spouse). This division is totally inflexible.

A Will provides the opportunity to name specific charities as beneficiaries and to detail the size and nature of the bequest. Gifts to charity by Will are called charitable bequests. It is vital that the charity’s full legal name be used in the Will otherwise the bequest may fail, thereby creating an intestacy.

Although most charitable bequests are motivated by philanthropic reasons and belief in the recipient charity, there are also income tax incentives for giving. It is therefore important to understand how charitable tax credits work as careful planning can reduce or eliminate income taxes owed at death by benefiting the selected charity in place of the taxman.

Charitable donations made by Will, or in the last year of an individual’s life, may be claimed against
100% of net income on the final income tax returns. Any unused tax credits can be carried backward to the year immediately preceding the death. By contrast, the contribution limit for charitable donations during one’s life is only 75% of net income.

A Will can also reduce income tax at death by enabling the executor of the will to distribute assets to the chosen charity in their original form (“in specie”). “In specie” gifts of publicly traded securities, employee stock options and ecologically sensitive land all receive a reduced capital inclusion rate of 25%, rather than the normal 50% rate. This incentive makes it twice as tax effective to transfer securities “in specie” rather than selling them and transferring the sale proceeds to the charity.

A charitable bequest in a Will is shaped by an individual’s values and personal priorities as income tax incentives only support existing values and priorities. In establishing an estate plan, it is therefore important for an individual to review their personal experiences and determine whether a charity has touched them. Through consultation with legal and financial advisors, an informed decision can then be made which balances personal and family needs with philanthropic wishes.  Contact us at (604) 535-4749, or use our contact page.

Executor’s Compensation

(applicable in all provinces except Québec)

Whether you have been asked to act as the executor of an estate or you are considering who you should appoint as executor in your Will, it is important for you to understand how an executor is compensated before making your decision. This article will briefly outline the rules governing executor’s compensation in the common law provinces and the factors you need to consider when choosing an executor.

How much are executors paid?

Executors are entitled to compensation for the work they do in administering an estate. As a general rule, an executor is entitled to compensation equal to about 5% of the value of the estate. This is calculated as 2.5% of the assets of the estate gathered in and 2.5% of the assets distributed. This is a one-time fee. Where the estate is invested for a period of time – for example, where trusts are established for minor or disabled beneficiaries or for a spouse – the executor/trustee is also entitled to an annual fee based on the average value of the estate. Note that where there is more than one executor, the fee is generally shared.

Court oversight

The “usual percentages” may however be subject to court discretion. Generally at the conclusion of an estate (or from time to time during the administration of a long term estate), the beneficiaries will be asked to approve the executor’s compensation. Where the beneficiaries do not approve or cannot approve because of a disability (as in the case of minor or disabled beneficiaries), they can require the executor to “pass their accounts” in court. As part of the passing of accounts, the court will review the compensation claimed. The preparation of accounts in proper court format can be a complicated and time-consuming process.

The Trustee Acts of all provinces give authority to a court to award a “fair and reasonable” amount in respect of the administration of an estate. In deciding what is “fair and reasonable” the court will consider the following factors:

• The size of the estate
• The size of the estate
• The complexity of the estate
• The time expended in administering the estate
• The skill and ability displayed
• The results of the administration

The compensation claimed may be adjusted up or down based on this analysis. In some provinces, compensation is limited to 5% of the realized value of the assets. In other provinces, compensation may be governed by provisions in the Will itself. Trust companies, such as Scotiatrust, prefer to have compensation settled up front with the testator by incorporating a fee agreement into the Will.

Who pays?

Executor compensation is paid from the estate. Debts, funeral and testamentary expenses represent a first charge on the estate. Following the payment of specific gifts, the balance is called the residue. It is from the residue that the executor is compensated.

Executor vs. Estate Solicitor
The roles of the executor and the estate solicitor are separate, but complementary. Where the estate solicitor performs executor’s work on behalf of the named executor, the solicitor is entitled to be compensated by the executor whose compensation must be correspondingly reduced. The estate solicitor should keep a separate account for legal work done on behalf of the estate.

Choice of Executor

The rules governing executor compensation apply equally to lay individuals and professional executors. That is, whether you appoint a corporate executor such as Scotiatrust or a family member, the level of compensation to which each is entitled is comparable. While it is true that a family member may choose to forego compensation, many personal executors do wish to be compensated for the considerable time and effort involved in administering an estate and this sometimes leads to family disharmony. You should also be aware that compensation paid to an executor is considered taxable income in their hands.

Making an decision

Compensation is just one factor to consider when determining whether to appoint an individual or a trust company as your executor and when determining whether or not to accept an appointment to act as an executor yourself. Being aware of the complexities, duties and rules involved will allow you to make an informed decision.

Contact us at (604) 535-4749, or use our contact page.