Successfully reported this slideshow.
We use your LinkedIn profile and activity data to personalize ads and to show you more relevant ads. You can change your ad preferences anytime.

Cross Border Estate Planning Issues For Dual Citizens - Cheyenne Reese

302 views

Published on

Cheyenne Reese, Legacy Tax + Trust Lawyers speaks about estate, tax planning and trust matters for dual Canadian and American citizens.

Published in: Law
  • Be the first to comment

  • Be the first to like this

Cross Border Estate Planning Issues For Dual Citizens - Cheyenne Reese

  1. 1. Cross Border Estate Planning Issues for Dual Citizens Cheyenne J.H. Reese Legacy Tax + Trust Lawyers September 20, 2017
  2. 2. The Rules Today  “Permanence” since December 2012 9/22/2017 © Copyright all rights reserved 2
  3. 3. 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
  4. 4. 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 © Copyright all rights reserved
  5. 5. 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 © Copyright all rights reserved
  6. 6. 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 © Copyright all rights reserved
  7. 7. 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 © Copyright all rights reserved
  8. 8. 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 © Copyright all rights reserved
  9. 9. 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 © Copyright all rights reserved
  10. 10. 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 © Copyright all rights reserved
  11. 11. 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 © Copyright all rights reserved
  12. 12. 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
  13. 13. 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
  14. 14. 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 14© Copyright all rights reserved9/22/2017
  15. 15. 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 15© Copyright all rights reserved9/22/2017
  16. 16. 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
  17. 17. 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 © Copyright all rights reserved
  18. 18. 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 © Copyright all rights reserved
  19. 19. 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 © Copyright all rights reserved
  20. 20. 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 © Copyright all rights reserved
  21. 21. What’s Next for the Estate Tax?  Estate Tax • Complete Repeal? • Repeal and Replace? • Sunset Repeal? 9/22/2017 21 © Copyright all rights reserved
  22. 22. What’s Next for the Estate Tax?  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 © Copyright all rights reserved
  23. 23. What’s Next for the Estate Tax?  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 © Copyright all rights reserved
  24. 24. 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 © Copyright all rights reserved
  25. 25. 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 © Copyright all rights reserved
  26. 26. 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 © Copyright all rights reserved
  27. 27. 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 © Copyright all rights reserved
  28. 28. 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. 9/22/2017 © Copyright all rights reserved 28
  29. 29. Principal Residence Exemption  Top U.S. capital gains tax rate 20%  Plus 3.8% Medicare surtax 9/22/2017 © Copyright all rights reserved 29
  30. 30. 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 9/22/2017 © Copyright all rights reserved 30
  31. 31. 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 9/22/2017 © Copyright all rights reserved 31

×