Recently, I received a note from a colleague who sits on the board of a social service charity as a volunteer.  This charity has an older, long-time donor who has named the charity in her will.  The problem is the charity prefers to have the estate donation to go to its parallel foundation, as it now does all of the fundraising for the charity through the foundation.  My colleague wanted to know what to do.

Legal Answer

The legal answer to this question is easy enough.  The charity should contact the donor and suggest she update her will with a codicil changing the beneficiary from the charity to the foundation.  The charity and foundations are separate legal entities and it is important to get the name correct in the will.

This solution is how the matter should, ideally, be addressed, but it’s important to consider the source of the question.  The person asking the question is a dedicated volunteer with no estate planning expertise dealing with an older donor who she didn’t know well.

Practical Administrative Answer

My colleague had a specific question for me.  She wanted to know what would happen if the donor died without changing her will.  Could the charity persuade the executor to distribute the estate donation to its closely aligned parallel foundation?  The strict legal answer is “no” but the practical administrative answer is probably “yes”.

The two charities may be related, but they are separate legal entities.  The charity and its foundation, however, share the same name, except for one entity uses “foundation” in its legal title.   This is a very common structure.  Two registered charities, at arm’s length, but structured to work together for a single cause.  One is a charitable organization – a doing charity – and the other is a public foundation – a holding and granting charity.  These foundations are typically called parallel foundations.   One entity is the  operating organization conducting its own charitable activities and programs.  The other is a fundraising entity that holds investments for the operating entity.  Most hospitals in the country utilize this structure, as well as many educational institutions and social service organizations.

Since the two-charity structure is so widespread in Canada, it is common practice for executors to be pragmatic.  A will naming the XYZ Hospital may be administered by making a donation to the XYZ Hospital Foundation.  The donor’s intent is obvious enough, and when asked, many executors redirect the payment.  Typically, everyone is happy with this solution.  The foundation issues a donation receipt and handles the donation professionally.  CRA typically accepts the donation tax receipt claimed by the estate.

I told my colleague that if the donor didn’t change her will there may be a post-mortem solution. Her charity may be able to convince the executor to distribute the estate donation to the parallel foundation.   It happens all the time, even though it is not legally correct.

Inter-charity Transfer

A number charities with parallel foundations have addressed the above scenario proactively by implementing an agreement between the charity and parallel foundation.  Some hospitals will receive and receipt estate donations – but not lifetime donations – and immediately make an inter-charity transfer to the foundation.  This is sometimes subject to an existing indenture agreement.

The charity must have charitable purposes that allow it to make a grant to the related foundation.  It is also wise to have policies and agreements to handle the money in accordance with donor wishes for the benefit of the charity.  These inter-charity arrangements need legal advice to establish.  Once in place, there will be a clear pathway to manage estate donations.

Charity Challenge

My colleague’s nervousness was palpable.  And frankly, her discomfort is understandable given the situation.  She is a volunteer.  Her charity is small.  They have no gift planner on staff.  The very idea of having a conversation with the donor about reopening her will and changing a bequest to a related entity seems fraught with risk.  Would the donor be receptive to the idea?  What if she changed her mind?  What if the gift might be endangered?

To a drafting lawyer, it is a mundane situation.  To the charity and its volunteers it is unknown territory.  I hope they have the conversation with the donor and make the update to the will now.  And if not, I hope the executor is pragmatic.