As presently practiced by such charities as the University of Toronto, Mount Sinai Hospital Foundation, and the United Church of Canada, the charitable remainder trust is a deceptively simple and relatively new financial instrument which may be more complex than it seems. In a typical CRT, an older, financially comfortable donor (the settlor) assigns ownership of a substantial asset (cash, securities, or real estate) to a charity, but retains the income from it during their life. A donation receipt will not be issued unless the trust meets the conditions set out in Interpretation Bulletin IT-226R, including a clear exclusion of any encroachment on the principal, but this may not be a serious drawback in many situations. The donation receipt (if one is issued) is received now for the present value of the future gift (the remainder or residue), based on its current value and the donors life expectancy using the standard mortality tables. Finally, a trust agreement protects the interests of everyone involved.

The value of the receipt is thus affected not only by the life expectancy, but also by the discount rate chosen. Revenue Canada has so far failed to give a clear, unambiguous directive in this regard, suggesting rather that charities “use reasonable judgment”. Various possible routes appear acceptable: the equivalent yield on a 30-year Government of Canada bond on the day of the transaction, or a Government of Canada bond with the same life expectancy as the donor’s. The Canadian Association of Gift Planners has suggested to the House of Commons Finance Committee that the government should prescribe both a discount rate and a Mortality Table (at present, charities are using the 1983 Tables), but there’s been no action yet.

The CAGP’s third major concern affecting CRTs was the depressing effect the taxation of capital gains had on the potential for major asset-based gifts. The federal government essentially eliminated this problem when, in the March federal budget, it increased the personal donation credit limit from 20% to 50%, and allowed an additional credit of 50% of the amount of the taxable capital gain arising from the gift, making it possible to consider larger gifts and crystallize a capital gain in the trust without attracting tax.

Whether or not a charitable donation receipt will be issued depends on whether or not the trust meets the conditions set out in Interpretation Bulletin IT 226R. The key considerations are that there can be no possibility of encroachment on the principal for beneficiaries other than the charity, the transfer must be irrevocable, the property must rest with the charity at the time of the transfer, the value of the charity’s residual interest must be measurable, and the claim must be supported by an official donation receipt from the charity.

Frank Minton, PlanGiv, recently pointed out, however, that a charitable donation receipt may be far from the most important consideration when setting up a CRT. Such trusts will often be set up to benefit a spouse or other family members. “Meeting family needs and objectives in paramount,” he said. “The tax tail should not wag the dog.” Gift planners, Minton stressed, should take a broad view of CRTs and recognize that in some instances, “a non-receiptable trust may best meet family objectives while ultimately benefiting the charity.”

The potential benefits can be attractive to the right donor: a substantial donation receipt for a gift made and recognized now, the ability to receive the income during their lifetime, confidentiality, and the gift transfers outside of the estate and not subject to probate. The major concern with this procedure is its (potentially) irrevocable nature. Personal financial advisors of the donors will want to ensure that adequate assets remain available to the donor, and not tied up in an irrevocable trust.

Trustees may be an individual, the charitable organization if it is authorized to serve, the donor, or a trust company. How appropriate would each of these choices be? In an address to the CAGP, David Windeyer, National Trust, asked some tough questions:

1. An individual – If you were asked to be a trustee for someone, realizing the responsibility and work involved, would you really want to take on the job? Are you prepared for it because of the education you have, or your experience or interest, or the professional contacts which you have to help you?

2. The donor – Do you really want your elderly donor to be responsible for the intricacies of trusteeship? Most donors will not want the responsibility, but if yours does, ask them the above questions.

How deep are your donor’s pockets if they do not keep adequate records, or pass away having spent the funds other than as allowed in the trust document? You want to ensure the residue is intact after they die. Further, your donor’s executor will be the new trustee, whom you may neither know nor want. There may also be delays in processing the final distribution to your organization if someone unfamiliar to the process is involved.

3. The charitable beneficiary – the charity. Does your organization have the required experience? Do you want to set up the structure within your office to handle trusts? Will the expense of running the trusts be covered by the trustee fees (set by the courts, or agreed to as part of the trust agreement)? What if you miss a payment to your donor or make some poor investments, or invest too many equities for growth when you donor wants income? Will the donor/charity relationship suffer?

Windeyer argues that the trust industry not only has safeguards to protect the public, but also is less likely to make mistakes. Aside from the regulations under various statutes, trust companies maintain insurance and assets for any errors.

Finally, Windeyer reminds charities to be concerned about the impact that their role as trustee might have on their relationship with their donor. Errors in managing the assets, the income, the reporting, and the tax return can, and in some cases, will happen. A professional trustee, he points out, removes you from this potentially troublesome area, and ensures that you will be able to maintain the good donor relationship which you have spent time nurturing.

What the Trustee needs to know

1. The actions of the Trustee are subject to the Trustee Act(s) of the various provinces.
2. The Trustee must be available at any time to answer any questions either party may have concerning the trust’s administration.
3. The Trustee must ensure that the income is sent to the income beneficiary in a timely manner and that the accounting is current at all times.
4. All required tax fillings must be done and the appropriate tax information be relayed to the beneficiaries.
5. The investment must be made in accordance with the powers given in the trust deed. If the investments are to be made at the discretion of the Trustee, they must nonetheless be invested prudently.
6. The Trustee must treat each beneficiary with an even hand unless specified otherwise in the trust agreement.
7. The Trustee will have to complete the administration (i.e. distribution to the charity), on the death of a life tenant.

What the Donor needs to know

1. Their funds are safe.
2. They should seek independent legal advice.
3. If they are receiving income it will be maintained and they will receive it in good time.
4. They will receive the appropriate tax benefit.
5. Realized capital gains will not be taxed.
6. All trustee fees are to be paid from income.
7. This trust will be outside of their estate and therefore not subject to probate or probate fees, and will thus have a reduced chance of being challenged.
8. They have the option of choosing more than one beneficiary, either for the income or the capital.

What the Charity needs to know

1. It can be assured that they will receive the residue of the trust upon the death of the last life tenant and in a timely manner.
2. It will receive accurate, periodic accounting of the activity of trust.
3. It may expect to see some capital growth, sufficient at least to keep up with any inflation (although the income beneficiary may have something to say about this).
4. There will be no loss in the value of the original principal (although a loss in value may occur if investments of a non-growth nature are made in the trust).
5. There is less of a chance of the gift being challenged than if it were made under a will.

The charitable remainder trust is clearly an attractive vehicle in a variety of situations. Depending on their situation, donors may arrange for future gifts; retain current income levels; save taxes now; provide income for a surviving spouse, child or sibling; protect privacy; and avoid probate. There remain, however, some unanswered questions aside from the choice of discount rate. Can, for example, a CRT have more than one charitable remainder beneficiary? Who, in such an instance, would issue the receipt? Can a CRT have more than one donor? Who gets the donation receipt? How should the trust fees be paid? Should charities act as their own trustees? As we find the answers to these and other questions, the use of this instrument in Canada will grow.

For more information, David Windeyer, National Trust, (416) 361-4096; David Boyd-Thomas, University of Toronto, (416) 978-5449; Ken Ramsay, United Church of Canada, (416) 231-7680, ext. 3146.