Planning for the spectre of multiple taxation on death

As clients and assets become globalized, estate plans must account for the rules that govern each jurisdiction

Planning for the spectre of multiple taxation on death

Nothing in this world is certain but death and taxes, as a famous quotation says. What it doesn’t say, though everyone understands, is that the form they come in is most often uncertain. And in the case of people with globalized assets, there’s a very real possibility of facing multiple taxation upon death.

“While some countries tax the deceased or the estate, others tax the beneficiary,” wrote Margaret R. O’Sullivan of O’Sullivan Estate Lawyers LLP in a new commentary. “There are also different bases for charging tax, such as citizenship, domicile, residency and asset location.”

O’Sullivan noted that Canada and some other jurisdictions tax capital gains upon death, while the estate tax mandated in the US often goes unpaid because of the massive $11.4-million exemption that’s now in effect there. Japan, Chile, Venezuela, and many other countries, she added, impose inheritance tax or succession duty on gifts and bequests that a beneficiary receives.

The existence of different tax laws across jurisdictions could result in the same assets being taxed several times. “[A] Canadian resident with a beneficiary living in Japan could have assets taxed twice: Canadian capital gains tax on the Canadian resident's death and inheritance tax payable on the same assets by the beneficiary who resides in Japan,” O’Sullivan said as an example. That means the client has to consider whether an inheritance tax burden falls on the estate or the beneficiary.

She noted that most Canadian will include a “debts and death taxes” provision stipulating that the estate will be paid by the estate, meaning that beneficiaries will get the same amount regardless of other taxes levied outside Canada. “However, if the inheritance tax or other tax is disproportionately high, beneficiaries living in Canada could be disgruntled if they end up bearing part of the burden,” she said, adding that inheritance tax could exceed 55% in some jurisdictions.

Under treaties with the US and France, taxes paid by Canadians in one country can be credited against taxes paid in the other. That includes Canadian capital gains taxes on assets, which can be counted against US estate tax or French inheritance tax. But O’Sullivan notes that there are few such treaties.

By restructuring assets or exploring other planning options, she said, Canadian may be able to minimize their exposure to multiple taxation. For instance, she said Canadians could potentially use a trust with a “blocker” corporation to shelter assets from US estate tax; alternatively, they could purchase insurance to cover the additional tax.

In France, investments held in certain life insurance vehicles are not subject to inheritance tax. And in the UK, trusts can be used to shield assets from inheritance tax for in some cases for certain persons not yet domiciled in the country.

Such contingencies will often depend on a client’s philosophy on the issue of inheritance, O’Sullivan noted. “Some clients value complete equality [for all their children] … believing that a child should not be ‘penalized’ for living in a jurisdiction with an inheritance tax,” she said. “Other clients may take the view that the beneficiary subject to the tax should bear the burden.”


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