A direct designation gift of RRIF or life insurance proceeds is an estate donation, but lawyers and executors have little or no role to play. Normal procedural and disclosure rules don’t apply. How do charities ensure they receive their intended gift? How does the estate receive its tax receipt?
Direct Designation Donations
Deemed or direct designation gifts were introduced in the Income Tax Act in 2000 to address a fairness issue. Prior to 2000, if a donor named a charity as beneficiary on registered fund plan documents or a life insurance policy there would be no tax benefits for the estate.
Registered retirement funds (RRSP and RRIFs) were especially problematic. A direct designation gift would not generate a donation tax receipt, but the deemed disposition on death would trigger a tax liability for the estate. Family beneficiaries would pay twice for a bequest to charity.
Pre 2000, the planning solution was to make the estate a beneficiary in plan documents and insurance contracts. The will would then name the charity. This two-step process worked fine but could lead to privacy issues for the testator. In certain provinces the donation would be subject to probate fees.
The direct designation rules aligned the tax benefits of all gifts at death, including a gift by will. Initially some provinces didn’t allow charities to be named on registered plan documents but that has been sorted out over time. In 2016, the creation of the umbrella concept of an estate donation in 118.1(5) further knit together the regime.
Making a registered fund or life insurance direct designation gift is relatively easy. The donor just needs to name the charity as a beneficiary on the plan documents or life insurance policy. While coordination with the will is advised, it isn’t always done. This can lead to estate administration challenges.
There are a few estate administration issues for charities and executors.
The charity is typically informed of the donation after the death of the donor. The notification comes from the advisor who holds the registered fund or sold the life insurance policy. The extent of the information provided to the charity is typically that it is owed X amount. The sum may be provided without supporting documentation. Charities are wise to ask for a copy of the plan documents or life insurance policy, as well as confirmation of the value at death. There is no legal obligation to provide this information, but most advisors are helpful. Often these distributions happen faster than gifts by will.
The charity also needs to issue a donation tax receipt to the estate of the deceased. The identity and contact information of the executor may require detective work to find out. Best to contact the executor directly and not work through the advisor or agent.
For executors, the existence of charity beneficiaries of direct designation donations may be a mystery. There is likely no reference in the will. These funds or policies may only be identified when there is an account search. The key issue is ensuring the tax receipt is received. If the tax receipt arrives soon after death it can be filed on the Terminal T1, which reduces tax liability for the estate upfront.
Sometimes privacy is the goal of donors of direct designation gifts. They don’t want the charity to receive detailed estate information. Conversely, they may not want beneficiaries under the will to find out about charitable gifts. This is an issue estate trustees will need to navigate on a case-by-case basis.
Direct designation estate donations have some advantages. They are not especially complex to administer post-mortem, but it helps if all parties ask a few extra questions to connect the planning dots.