It is common for individuals to include charitable bequests in their estate planning, usually structured in the following forms:
Currently a gift by Will or a gift by direct designation is treated for tax purposes as having been made by the individual immediately before death. This treatment results in the tax credits arising from the gift being applied to the deceased’s final tax return, with any excess credit available to be carried back and used against the previous year’s tax. However, the tax credits arising from a gift by Will or direct designation may not be claimed by the estate. The result is that, often, a portion of the personal tax credits is wasted because the deceased does not have enough tax due in the year of death and the prior year. Similarly, where the donation constitutes a gift from the deceased’s estate only the estate can claim the donation. If the estate does not have enough tax to fully utilize the donation credits, the excess may not be claimed on the deceased’s final tax return. Again, the result is the loss of the full potential tax benefits from the donation.
Recent draft legislation, proposed to apply in respect of deaths after 2015, is intended to correct some of these problems by providing flexibility in the utilization of donations. Under the draft legislation a gift by Will or by direct designation will no longer be deemed to have been made by the deceased immediately before death. Instead, the gift will be deemed to have been made by the estate at the time the donation is made. This change will put all donations arising from death in the same place, the deceased's estate.
However, provided the donation is made within 36 months of death the estate trustees will have the option to claim the donation in the estate (including prior years) or in the individual's last two taxation years ending at the date of death. The increased flexibility in the utilization of donations may make drafting Wills easier and allow for the maximum amount of tax credit for donations to the deceased and the estate.
The new rules also address the difficulty in valuing donations. Currently the value of a gift by Will or a gift by direct designation is the value at the time of death. It is difficult for charities to determine the value at the date of death when the donation may not be made for 36 months or longer. Under the new rules the valuation date will be the day the donation is actually made. This change will simplify the valuation process for the recipient charity but may make it impossible to claim the donation on the initial filing of the deceased’s final tax return. In those cases, amending the deceased's terminal tax return may be required.
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