Cross Border Estate Planning Issues For Dual Citizens - Cheyenne Reese

Cross Border Estate Planning
Issues for Dual Citizens
Cheyenne J.H. Reese
Legacy Tax + Trust Lawyers
September 20, 2017

The Rules Today
 “Permanence” since December 2012
9/22/2017 © Copyright all rights reserved 2

U.S. Estate Tax
 Imposed on transfers of property on
death
 For U.S. citizens and residents,
imposed on worldwide taxable estate
 For U.S. citizens and residents exemption
now at $5,490,000 (adjusted for inflation)
 Top rate of estate tax is 40%
9/22/2017 3
© Copyright all rights reserved

Example – U.S. Citizen Deceased
Deceased dual U.S. and Canadian citizen and
Canadian resident owned the following assets:
U.S. $
Insurance Proceeds 1,000,000
RRSP 1,000,000
House 1,000,000
Canadian Investments 1,500,000
U.S. Investments 1,000,000
U.S. Condominium 1,000,000
Total $6,500,000
9/22/2017 4

Example – U.S. Citizen Deceased
U.S. Estate Tax Calculation:
Gross Estate Tax $2,545,800
Less Applicable Credit ($2,141,800)
Net Estate Tax $404,000
Credit for Canadian capital gains tax paid
Surviving Spouse a U.S. Citizen?
Unlimited Marital Deduction
Olden Days - Traditional Planning – Shelter Trusts
Portability
Surviving Spouse Canadian Only?
Treaty Marital Credit – Extra $2,141,800 – no tax!
9/22/2017 5

U.S. Estate Tax
 For non-citizen non-residents, imposed
on “U.S. taxable estate”, includes:
 Real property located in the United States;
 Shares in a U.S. corporation;
 Trusts with retained interests; and
 Tangible personal property located in the United States
9/22/2017 6

U.S. Estate Tax (cont’d)
 Residency based on “domicile”, all others
non-resident aliens (NRA)
 For NRA, $60,000 is exempt
9/22/2017 7

NRA’s Treaty Credit
 $13,000 credit, shelters $60,000
 Treaty Credit = proportionate credit
U.S. Assets x $2,141,800 (2017)
Worldwide Assets
Available to every Canadian resident (other than a
U.S. citizen)
Also, U.S. estate tax available as a credit against
Canadian capital gains tax payable on U.S. asset
9/22/2017 8

Calculation of NRA’s Estate Tax
 Extra Marital Credit
• Calculated same as Treaty Credit
• Outright to Canadian Spouse or in qualifying trust
for Canadian Spouse
• Better than QDOT because savings (up to
$2,141,800) vs. deferral
 Unlimited Marital Deduction for property passing to a
U.S. citizen spouse or qualified trust for U.S. citizen
spouse
9/22/2017 9

Example – Canadian Deceased
Deceased Canadian citizen and Canadian resident
owned the following assets:
U.S. $
Insurance Proceeds 1,000,000
RRSP 1,000,000
House 1,000,000
Canadian Investments 1,500,000
U.S. Investments 1,000,000
U.S. Condominium 1,000,000
Total $6,500,000
Estate would be entitled to an Applicable Credit of $654,092,
as follows:
$2,000,000 x $ 2,141,800 = $659,015
$6,500,000
9/22/2017 10

Calculation of NRA’s Estate Tax
U.S. Estate Tax Calculation:
U.S. Taxable Estate $2,000,000
Tentative U.S. Estate Tax $745,800
Less: Applicable Credit ($659,015)
Equals: Net Tax $86,785
Credit for Canadian capital gains tax paid (accelerate if
necessary)
Surviving Spouse a U.S. Citizen?
Unlimited Marital Deduction
Surviving Spouse Canadian Only?
Treaty Marital Credit – Extra $659,015 – no tax!
9/22/2017 11

Basis Issues
 U.S. Estate tax is 40% on each $1
above $5,490,000
 U.S. Capital Gains tax is up to 20%
plus 3.8% (plus State tax if
applicable) with foreign tax credit
only against U.S. federal capital
gains tax
© Copyright all rights reserved 129/22/2017

Basis Issues (Cont’d)
 Canadian capital gains tax payable in any
case on death (or on surviving spouse’s
death)
 The capital gains tax issue will now often
drive planning instead of U.S. estate tax
13© Copyright all rights reserved9/22/2017

Basis Issues (Cont’d)
 If property is includible in decedent’s
estate (regardless of whether estate tax is
payable) is entitled to an increase in cost
basis for U.S. purposes to fair market
value at date of death
 If property is held in a U.S. estate tax
protected manner (e.g. bypass trust) no
automatic increase to cost basis to fair
market value

Basis Issues – Case Study
 Canadian spouse (Spouse A) holds shares
in a Canadian corporation with significant
potential for continued appreciation, now
worth $10M
 U.S. surviving spouse (Spouse B)
 Two children, both dual U.S. and Canadian
citizens
 Traditional Planning in Spouse A’s Will –
all in U.S. estate tax protected trust for
Spouse B

Case Study (Cont’d)
 Problem? If Spouse A dies first, kids
inherit shares with cost base equal to
fair market value on Spouse B’s date
of death for Canadian purposes but
because trust is U.S. estate tax
protected, U.S. cost base is Spouse
A’s date of death value
© Copyright all rights reserved 169/22/2017

U.S. Gift Tax for U.S. Citizens
 Imposed on transfers of property during
lifetime
 Same graduated rates as the estate tax
 Imposed on transfers on a cumulative
basis
 For U.S. citizens and residents, Applicable
Credit (maximum $5,490,000) applies to
gift tax and reduces exemption at death
9/22/2017 17

U.S. Gift Tax for U.S. Citizens (cont’d)
 Annual Exclusion – each year an individual
is entitled to gift up to $14,000 to each of any
number of donees
 Increased to $149,000 for gifts to non-U.S.
citizen spouse
 Direct payments of medical and tuition
expenses are generally excluded from taxable
gifts, regardless of amount
 Marital Exclusion – unlimited deduction for
gifts to a U.S. citizen spouse only
9/22/2017 18

U.S. Gift Taxation of NRAs
U.S. Gift Tax Liability for NRA
 Gifts of U.S. real estate or tangible
personal property located in U.S.
• Gift of vacation property itself; or
• Gift of cash if gift completes in the
U.S.
 40% top gift tax rate
 Does not apply to shares in U.S.
corporations
9/22/2017 19

U.S. Gift Taxation of NRAs
 Treaty credit is not available to offset tax
on gifts by an NRA
 No foreign tax credit for Canadian capital
gains tax and vice versa
• Canada treats gifts as disposition at fair
market value
 $14,000 annual exclusion is available
 Deduction for gift to NRA spouse is limited
to $149,000 (2017) per year
 Gifts to U.S. citizen spouse qualify
9/22/2017 20

What’s Next for the Estate Tax?
 Estate Tax
• Complete Repeal?
• Repeal and Replace?
• Sunset Repeal?
9/22/2017 21

 Repeal for Whom?
• Difference between U.S. and Non-U.S.?
 Replace with What?
 Repeal for How Long?
 Need 60/100 Senate Seats –
Republicans hold 52
9/22/2017 22

 Donald Trump’s Deemed Disposition
Proposal
• Exemption for $10M of assets
• $10M per person or per couple?
• $10M of fair market value or gain?
• Step-up in basis on first $10M?
• Exemption for family farms and small
businesses only? Or just different?
9/22/2017 23

What’s Next for the Gift Tax?
 Repeal?
 No Change?
 Even Less Incentive for NRA to Gift
U.S. Real Estate
9/22/2017 24

What’s Next for the Gift Tax?
 Republican Platform and Trump’s
Campaign Plan are silent
 Gift Tax protects State income tax
system
 Carryover Cost Base of a Gift
9/22/2017 25

What’s Next for the Generation-
Skipping Transfer Tax?
 Repeal if Estate Tax is Repealed?
 No Change? Tied to Estate Tax…
 Retain to add to Gift Tax?
9/22/2017 26

What’s Next for Minority Interest
Discounts?
 Valuable tool to reduce Estate Tax
and Gift Tax liability
 Significantly reduces revenue from
the transfer taxes
 Attempts to eliminate discounts for
years
 Now? Stalled.
 If Estate Tax and/or Gift Tax
remain?
9/22/2017 27

Principal Residence Exemption
 U.S. capital gains exemption on the
sale of a principal residence is
USD$250,000 for an individual or
USD$500,000 for spouses filing
jointly
 Helpful in many markets. Not,
however, in the Vancouver or
Toronto regions, for example.

Principal Residence Exemption
 Top U.S. capital gains tax rate 20%
 Plus 3.8% Medicare surtax

PRE – Planning to Avoid U.S.
Capital Gains Tax
 Planning with a Non-U.S. Spouse
 No deemed disposition on death, so
if below U.S. estate tax threshold
and not anticipating sale, no problem

Conclusion
Careful Estate Planning creates significant U.S. tax and
other savings.
Thank You.
Legacy Tax + Trust Lawyers
Cheyenne J.H. Reese
604.631.1251
creese@legacylawyers.com

Cross Border Estate Planning Issues For Dual Citizens - Cheyenne Reese

Recommended

Recommended

More Related Content

What's hot

What's hot (19)

Similar to Cross Border Estate Planning Issues For Dual Citizens - Cheyenne Reese

Similar to Cross Border Estate Planning Issues For Dual Citizens - Cheyenne Reese (20)

Recently uploaded

Recently uploaded (20)

Cross Border Estate Planning Issues For Dual Citizens - Cheyenne Reese