FALSE HOPE: U.S. ESTATE TAX EXEMPTION INCREASED
The United States Congress enacted tax legislation last year, ushering in several changes to the wealth transfer tax system, which took effect on January 1, 2018. Under the new law, the federal estate, gift and generation-skipping transfer (“GST”) tax exemption amounts will increase to $11,200,000 for individuals and $22,400,000 for married couples, from $5,490,000 and $10,980,000, respectively, in 2017. These exemption amounts are scheduled to increase with inflation each year until 2025. On January 1, 2026, the exemption amounts are scheduled to revert to the 2017 levels, adjusted for inflation. The highest marginal federal estate and gift tax rates will remain at 40% and the GST tax rate will remain a flat 40%.
Effect on Canadians with United States Property
The above noted exemption amounts are for United States citizens and residents on their worldwide estates. Non-resident, non-U.S. citizens (i.e. Canadian citizens living in Canada) are entitled to a mere $60,000 exemption. Yes, you read that correctly, $60,000. No, I did not forget a zero or two. $60,000, that’s it. If you have a condo in Florida with a fair market value on date of death of $250,000, you would owe U.S. estate tax. Thankfully however, the U.S. Canada Tax Convention (the “Treaty”) contains some relief.
Estate Tax Return Filing Required
Don’t be lulled into thinking you don’t have to do anything since you’re estate is under the exemptions. Even though the U.S. estate tax exemption amount has doubled making even fewer estates than before subject to paying estate tax, as required under the Treaty, Canadian estates that own property situated in the U.S., such as real estate and shares in U.S. corporations, are required to file IRS Form 706-NA, U.S. Estate Tax Return, in order to get the benefit of the higher exemptions.
Clearing Title to Real Property
Further, in order to transfer or sell U.S. real property owned by a deceased person, whether solely or jointly with another person, the estate or surviving joint owner must obtain a Tax Certificate from the IRS and record it with the registry of deeds in the county where the property is located or otherwise required by local law. You will be able to sell the property without clearing title. The Tax Certificate is just one requirement to clear title. You must contact experienced counsel in order to determine what other requirements exist.
Financial institutions also usually require a Tax Certificate from the IRS in order to transfer ownership of shares in U.S. corporations.
Even though the Treaty contains relief from the estate tax, it does NOT contain relief from the gift tax. Therefore, if you add Johnny or Suzie to the title of your Florida condo, you have just made of gift of at least a portion of the current value of the property, if not all of the value of the property. Congratulations, you now have a U.S. gift tax liability payable in full to the IRS.
It is highly recommended that you not conduct any DIY estate planning and instead seek out experienced cross border estate planning counsel.
Then if the Canadian deceased individual owned the property, bank accounts or shares in U.S. corporations in his/her own name, the estate will be required to commence probate proceedings in order to legally represent the estate (appointment of an executor or personal representative) and ultimately transfer ownership of the property or accounts. Probate is beyond the scope of this post, but it has been written previously by the author on this Blog.
If you have any questions about U.S. estate tax or owning property in the United States in general, please do not hesitate to contact Michael Kennedy at firstname.lastname@example.org or 519-252-3888.
About Ingenuity Counsel & Michael Kennedy
Ingenuity Counsel, based in Windsor, Ontario, Canada, provides cross border tax & United States legal services to Canadians. Michael Kennedy, with 15 years of legal experience, and his team at Ingenuity Counsel Incorporated, assist companies and entrepreneurs with immigration, business, real estate and tax matters in the U.S. With his expertise, he is able to walk clients through the process of successfully setting up their business in the United States. Additionally, Ingenuity Counsel advises clients that own property in Florida, Michigan, Arizona & California with respect to income tax, estate planning & administration matters. Michael also handles wills & trusts, powers of attorney and probate administrations. Whether you have real property, financial accounts or business assets located in the United States, Michael and his team can help.
Michael is admitted to practice law in California & Michigan and permitted by the Law Society of Upper Canada to provide U.S. legal services in Ontario as a Foreign Legal Consultant. Prior to establishing Ingenuity Counsel in 2012, he practiced law in the United States for more than 10 years in California, Michigan and Florida. Michael has a U.S. law degree (JD) from Western New England University School of Law and his master of laws degree (LLM) from Georgetown University Law Center in Washington DC.
IRS Circular 230 Disclosure
To ensure compliance with requirements imposed by the U.S. Internal Revenue Service, we inform you that any tax advice contained in this communication (including any attachments) was not intended or written to be used, and cannot be used, by any taxpayer for the purpose of (1) avoiding tax-related penalties under the U.S. Internal Revenue Code or (2) promoting, marketing or recommending to another party any tax-related matters addressed herein.
The information contained herein is for informational purposes only, and cannot be relied upon as legal advice. Every person’s needs and situation are different that must be analyzed independently. After reading this article, if you feel you have, or a client has, U.S. estate or gift tax exposure or any other U.S. tax or legal issue, you should promptly consult with an experienced U.S. lawyer in order to examine the situation. Your reliance upon any information contained in this article will not create an attorney-client relationship with the author.
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