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How Residual Interest Gifts Provide Donors with Options

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Having options when it comes to one’s philanthropy can be a good thing. For donors who have valuable assets that they wish to leave to charity but are concerned about their future cash needs or wish to have access to a gifted asset during their lifetime, one option to consider is a Residual Interest Gift.

A Residual Interest Gift offers access to potential income or to a favourite asset for life, while maximizing tax benefits and leaving the remainder of the donated asset value in support of the donor’s preferred cause.

In this article we’ll take a closer look at the two distinct categories that a Residual Interest Gift falls into, which include a Charitable Remainder Trust and simple Residual Interest Gifts. We’ll look at the benefits of each category and how a professional advisor at Gift Funds Canada can help.

Charitable Remainder Trusts (CRT)

For donors whose primary consideration is receiving income from an asset during their lifetime, such as appreciated securities, registered retirement plans or rental properties, a Charitable Remainder Trust (CRT) can be a suitable option.

A CRT is any type of trust (inter vivos or testamentary) created by a donor where all or a portion of the Trust’s assets are to be distributed to a charity upon the death of the donor. The donor or the Trust may qualify for a donation receipt depending on how the Trust is structured and whether or not it meets CRA conditions. Creating a trust requires careful planning to ensure that it achieves the donor’s wishes and a donation receipt is issued to the appropriate entity. For a donor to receive an immediate donation receipt, the terms of the Trust must specify that the capital remains intact for the benefit of the charity while only the income is paid out to the donor.

When the donor passes, the gifted capital stays intact without going through probate, and any capital gains realized by the Trust will be taxed in the hands of the Trust. Once a CRT has committed to gifting its capital to a specific charity (the capital beneficiary) the capital portion of the trust must remain intact with only the income being directed to the donor (the income beneficiary). An experienced professional advisor can help donors set up this type of giving strategy to ensure their gift aligns with their philanthropic goals.

Simple Residual Interest Gifts

A Simple Residual Interest Gift offers similar benefits to a CRT with a few differences. In the case of a Simple Residual Interest Gift, a donor would gift an asset with the full understanding that they will have sole access to or discretion over the use of the asset for their lifetime. The charity will issue an immediate donation receipt to the donor at the time of the donation. The amount of the receipt will be based on the estimated present value of the residual interest of the donated asset when the donor passes. At this time, the gifted capital resulting from the sale of the asset stays intact without going through probate, which can ease complications and save time.

A Residual Interest Gift strategy may provide donors with options and benefits for assets that they wish to use during their lifetimes. These benefits include accessing potential income or a favourite asset such as property for the duration of their lifetime, maximizing tax benefits in life, and helping them to support a preferred charity after they pass. For donors interested in this giving option it is a good idea to speak with their professional advisors and an organization such as Gift Funds Canada, to make the best decision for their unique situation and philanthropic goals.