Tag: US estate tax

The latest state of the US Estate Tax

If there is one constant that can said about the US Estate Tax over the last decade, ironically it is that it is constantly in a state of change.

Since 2002 the threshold estate asset level to fall within the purview of the tax has been boosted, accompanied by an easing of the applicable rates.  The upshot has been a lessened likelihood of being subject to the tax, and lower expected cost.  Once again however, the spectre of greater exposure lies on the horizon, with the latest threshold and rate figures scheduled to go in the opposite direction on January 1, 2013.

For Canadians holding US situated property, it’s again time to sit up and take notice.

Scope of the tax

Generally the tax is applied to US citizens and residents, and to non-residents on their US situs property.  Fairly obviously it is applicable to real property, but also may apply to tangible personal property such as furniture and other fixtures accompanying or attached to real estate.  Intimate personal items such as clothing and jewelry will be less likely to be included, but the facts of a given situation could be ruled otherwise by the US Internal Revenue Service. 

In terms of investment assets, US pensions and shares of US corporations are caught, as are debt obligations of US corporations, of US citizens and of the US government (with some exceptions in this last respect).  This covers both registered and non-registered accounts, but would not extend to such securities held within Canadian mutual funds.  

2013 changes

American domestic law exempts $60,000 of a non-resident’s assets from being subject to the Estate Tax.  The Canada-US Treaty extends the exemption level for Canadian residents and citizens effectively up to the level to which Americans are entitled.  For a Canadian dying in 2012 with a worldwide estate of less than $5 million (as calculated under these rules), no tax would be due.  For estates above, remember that it is still only the US situs assets that are subject to the tax.

In 2013, the asset threshold is scheduled to drop to $1 million, with the upper reaches of the graduated bracket scale to again apply, up to the top rate of 55%.  

If this sounds like “déjà vu all over again” (thank you, Yogi Berra), on January 1, 2010 the $3.5 million threshold and 45% bracket were repealed pursuant to a 2001 enacted sunset provision.  The $1 million threshold and 55% top rate were scheduled to apply once more as of January 1, 2011, but this never happened due to a new law passed in December 2010 that retroactively set the asset level and top rate to $5 million and 35% respectively for 2010, and through to 2012.

If you got lost in that, just skip back one paragraph as a reminder that $1 million of worldwide assets will get a deceased Canadian into the club in 2013.  That’s assuming of course that there are no further adjustments following the US presidential election. 

Planning possibilities and priorities

As may be evident from this historical recap, one must be aware of this state of change, but tread carefully before planning against it.  Actions taken one year may turn out to be futile and/or unnecessary shortly thereafter, and costly in terms of transactional and professional fees to boot.

Still, those motivated to look further should consult both Canadian and US tax and legal counsel about ways they may be able to reduce the impact of the tax, including:

  • For those with shortened life expectancies, possibly selling property before death
  • Implications of lifetime gifting, particularly in light of the coordination of the US Estate Tax with the US Gift Tax, and the lack of coordination of this latter tax with Canadian foreign tax credits
  • Allowance and limits to claiming US Estate Tax as a foreign tax credit on a Canadian terminal tax return 
  • CRA’s revised position on corporate ownership of US real estate since 2005, grandfathering reminders for existing corporate ownership, and alternatives for holding title on newly-acquired US real estate

Snowbirds and US Estate Tax Planning … NOW!

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.