Legal precedents are invaluable – except, that is, when they are wrong or out of date. Recently a Scotiatrust colleague contacted me about a clause in a client’s will that was intended to create an endowment fund at a registered charity. The clause imposed a 10-year capital hold on the donation. He asked, “is this clause still necessary?”
The short answer is “no”. The longer answer is “this clause was never necessary.”
A bit of background may be helpful.
The 10-year gift mechanism was a piece of trust law inserted into the Income Tax Act in the 1970s and abolished in 2010. It was the only way a charity could hold a lifetime gift for an endowment, otherwise 80% of the donation needed to be spent on the charitable purpose in the following year. The provisions required the donor to instruct the charity to hold onto the capital of the donation for a minimum of 10 years per section 149.1(1). That’s right: no use of capital for a decade.
As I wrote in 2010, the provision was illogical and burdensome to charities. It created an administrative requirement to track multiple ten-year gifts. It was inconsistent with most charity endowment policies and endowment fund agreements. And, in the event of investment losses, it prevented charities from using much needed funds.
Sloppy Drafting
And it makes even less sense today, especially in a will. This was a provision that only applied to lifetime gifts pre-2010, yet mistakenly it was included in wills. Otherwise unrestricted gifts by will could be used at a charity’s discretion – for endowments, spend-down funds or immediate use. It was only sloppy drafting that makes an estate donation into a ten-year gift.
I flag this issue because donors want to enable charities they support to do good work, not tie them in legal knots. When the goal is to fund an endowment at death, the donor should speak to the charity to establish the terms. A will with redundant or contradictory trust restrictions may do the charity more harm than good.
Very helpful, thanks Malcolm!
Thanks Gosha –
I appreciate the feedback. Malcolm
Yes, Very helpful but how does one get around this thought process of major donation over 10 years?
Robert –
Thanks for your comment. Tell me more on your comment “how does one get around this thought process of major donation over 10 years?” I’m not sure I understand, but I want to!
Malcolm
Thank you Malcolm! Having worked in the industry for 15 years, I saw many older wills that had instructions for trusts with these clauses. Now it makes sense and answers that nagging question “why??”.
Hi Jill – Obscure drafting mystery solved. I really appreciate the note! Malcolm
This is so helpful, we have a lot of old files to go through to identify where it’s been included! I also need to set up a meeting with a lawyer to sort out the best communications and course of action in light of this clarification. Thanks, Malcolm!
Jen – Helpful and relevant. You’ve made my day. Thanks for the comment. Malcolm
Fantastic advice. Thank you 🙂
Thanks Ian. I’m glad it’s helpful. Malcolm