Dual citizens and those with U.S.-located assets need proper planning to avoid unnecessarily exposing their beneficiaries
As the coronavirus pandemic continues to make health and wealth top-of-mind among Canadians, the need for solid estate planning is clearer than it’s ever been. And for those who are dual citizens or have properties in the U.S., overlooking that need may very well lead to grave complications on their death.
“On an individual's death, a US estate tax is imposed on both US citizens (based on their worldwide estates) and non-US citizens (to the extent that they hold certain US-situs assets),” wrote Jennifer Katz of Minden Gross LP in a recent note.
For the year 2021, Katz noted that U.S. citizens benefit from an estate tax exemption applied to the first US$11.7 million of their assets worldwide – the largest exemption ever applied for the estate tax. Worldwide assets that go beyond that amount can be taxed at a rate as high as 40%.
“The Biden campaign has proposed to reduce the estate tax exemption amount to USD$3.5 million and to increase the top tax rate applied to estates to 45%,” she said.
Currently, the exemption extended to non-U.S. citizen Canadians who are subject to U.S. estate taxes is pro-rated according the share of their U.S.-situs assets relative to their worldwide estate; their U.S.-situs assets in excess of that “ground down” exemption amount is subject to estate taxes at a rate of up to 40%.
To mitigate their beneficiaries’ exposure to U.S. estate taxes upon their own death, Katz said, those Canadians subject may use certain “Americanized” trusts in a testator’s will; under such structures, payments to the beneficiary are limited to income and capital for “health, education, maintenance, or support” purposes, which effectively prevent the assets from formally vesting in the beneficiary in the eyes of U.S. tax authorities.
“Notwithstanding these income and capital limitations, there is some flexibility in these trusts if payments of income and/or capital beyond these limitations are required,” she said.
Beneficiaries can generally be trustees of their own trusts, Katz noted, which puts a certain amount of control over the assets in the hands of the beneficiary. But the effectiveness of the strategy, she said, hinges on the planning being completed before the beneficiary inherits.