A Graduated Rate Estate is a federal provision that allows for a new way of applying a tax credit received for a charitable bequest in a will. If you are making a gift to charity the only way you can carry the donation tax credit back to the year of death and the year before that, is if the gift is made in a Graduated Rate Estate.
Before 2016 when someone died, all assets were deemed sold immediately before death at fair market value. Capital gains and other taxes resulting from these deemed dispositions, were taxed on the deceased’s terminal tax return. If some of the wealth was left to charities, the resulting tax credit was applied on that same return to offset taxes.
Today, 2020 (starting at the beginning of 2016) this no longer applies. Fundamental changes include:-
• A charitable gift stipulated in the will shall no longer be deemed made by the deceased for tax purposes. It will be deemed to be made by the estate.
• The value of the gift for the purposes of calculating the donation tax credit is determined at the time when the bequest is actually transferred from the estate to the charity.
• The option to set up a Graduated Rate Estate (GRE) in a will. This is a testamentary trust that begins at death and can last up to 36 months. During this period, graduated tax rates apply – monies earned can potentially be taxed at lower rates than the top marginal rate. The GRE will also allow the executor to choose between several different tax years in which to allocate the donation tax credit as follows:-
• The tax year of the GRE in which the donation is actually transferred to the charity.
• An earlier tax year of the GRE
• The deceased’s terminal return
• The year prior to death.
If you are planning to make a charitable donation to offset taxation at death, you can update your will to stipulate that the estate lasts up to 36 months and establish a GRE.
This may be a good time to review your will.