In case you haven’t heard, there is no US Estate Tax exigible for the year 2010.
This is the result of provisions enacted by the US Congress back in 2001 that progressively reduced the impact of this tax, to the point of repeal at the end of 2009. That’s the good news.
The bad news is that there was a built-in sunset clause that brings the tax back on January 1, 2011 … but under more onerous rules as applied in the year 2000.
Obviously this has implications for Americans, but it also could have a serious effect on your Canadian clients with holdings south of the border.
Application to Canadians
The calculation can be complicated, and can change from year to year, but roughly the tax applies if a deceased person’s total assets exceed a figure known as the “asset exclusion amount.” It is the excess over this exclusion that is used as the base in a graduated bracket formula.
For a Canadian resident who is a non-US citizen, that base is limited to the proportion of “US situs assets” to worldwide assets. US situs assets includes US real estate and securities, even if held in a Canadian account, registered or non-registered.
For a person who died in 2009, the exclusion amount was $3.5 million and the top marginal bracket rate was 45%. Both figures were repealed for 2010. Absent further legislation, the exemption will be $1 million and the top rate 55% in 2011.
Watch your back
Satirical comments and Writing appeared toward the end of 2009 speculating whether under-the-weather wealthy people might be kept on life support to make it into 2010. As December 31, 2010 now approaches, might the wealthy be watching their backs more closely? Or would some even consider, as one headline suggested tongue-in-cheek in a reputable tax publication, “Suicide as an estate planning tool”?
Then again, maybe a charmed life will become a charmed death. Take, for example, former New York Yankees owner George Steinbrenner, who died in June. His ‘timely’ death might have saved his heirs as much as $500 million in estate taxes.
Renewed planning priority
Beyond these morbid curiosities, there really is a serious planning issue to contend with.
With the return of a $1 million asset exemption, many more of your Canadian clients will find themselves at or nearing exposure to this tax. And this is nearer than you might think, given the broad scope of estate assets for this purpose, including insurance held on one’s own life.
Fortunately, planning measures may be undertaken to reduce the impact of this tax. Still, this will be novel planning territory for many, and therefore it will be important to raise the issue soon and often in order to press clients into action.