Estate Planning Council of Toronto: Estate Tax Update

Transcription

1 Estate Planning Council of Toronto: Ian Macdonald November 5, 2013

2 Agenda US Estate and Gift Tax Update 1. New Rules 2. Implications for US Citizens Living in Canada 3. Implications for Canadians with US Property 4. Non Compliant US Citizens 2

3 New Rules US Transfer Taxes $5 million exemption amount for all three taxes is indexed for inflation after 2011 The inflation indexed amount is $5,250,000 for 2013 Establishes the top gift, estate, and GST tax rates at 40% for gifts made and decedents dying in 2013 and thereafter 3

4 New Rules Might result in far fewer people need estate planning? ,000 estate tax returns filed with more than 60,000 that were taxable ,000 returns filed with fewer than 4,000 taxable 2/10s of 1% have estate tax planning issues 4

5 New Rules US Gift and GST Taxes Annual gift tax exclusion amount is increased for 2013 The inflation-adjusted gift tax annual exclusion amount has increased to $14,000 from $13,000 The annual exclusion amount for gifts to a spouse who is not a U.S. citizen has increased to $143,000 from $139,000 5

6 New Rules Portability of Unused Exemption Generally assets and lifetime exemptions were considered separate between spouses. To maximize each exemption, estate planning typically required complicated planning (eg. transferring assets, credit shelter trusts) New rule allows the executor of deceased spouse s estate to transfer any unused exemption to the surviving spouse without such planning Transferred exemption can be used for or transfers at death Effectively $10.5 million exemption for US couple 6

7 New Rules Portability of Unused Exemption The carryover of unused exemption is called the Deceased Spousal Unused Exclusion Amount (DSUE) Does not apply to generation skipping unused exemption from deceased Cannot stack exclusions so DSUE limited to the amount used by last deceased spouse Timely estate tax return must be filed and an election must be made to carryover the unused exclusion amount Is it still worth doing traditional planning to maximize exemptions? 7

8 Example of Portability Rules (US Couple) John & Ruth, married US citizens John is worth $3M Ruth is worth $4M John dies in 2013 No US estate tax ($5.25M exclusion exceeds $0M used) Ruth s estate now worth $7M $4M herself plus John s $3M estate If Ruth dies in 2013, she would be entitled to: Her $5.25M exclusion plus John s unused $5.25M exclusion Net result NO US Estate Tax 8

9 New Rules Portability of Unused Exemption Still worthwhile to prepare Credit/Shelter Trusts? Protecting assets for children or the surviving spouse due to a second marriage by surviving spouse Asset protection from creditors Assets could increase in value and would be subject to exposure if held directly by the surviving spouse Administration of the estate could be reduced given the formality of such trusts So it still could make sense to file a US Estate Tax return to preserve DSUE. 9

10 New Rules What does this mean for people who are... US citizens living in Canada? Canadians who own US property? 10

11 US Citizens Living in Canada 11

12 US Citizens Living in Canada Who is a US Citizen? Person born in U.S.A.; or Naturalized; or With a U.S. parent (under certain circumstances) o Watch for! o Many of these in Canada Many don t know or are in denial 12

13 US Citizens Living in Canada Who is a US Citizen? Person born outside US to a US parent o Depends on Year of child s birth U.S. physical presence of US parent Includes dual citizens of Canada and US 13

14 US Citizens Living in Canada Who is a US Citizen? Examples of some of the rules: Born after 12/23/52 & before 11/14/86 o One parent is U.S. citizen; and o was physically present in U.S. for at least 10 years prior to the child s birth (at least 5 of which were after age 14) Born on or after 11/14/86 o One parent is U.S. citizen; and o was physically present in U.S. for at least 5 years prior to child s birth (at least 2 of which were after age 14) 14

15 US Citizens Living in Canada US citizens subject to US estate tax on fair market value of worldwide estate, which includes ALL property owned at death, even the following: o Certain trust interests o Insurance proceeds o Registered plans; i.e. RRSPs and RRIFs and pensions o Property jointly-held with spouse Jointly-held property is 100% includable unless surviving spouse is a US citizen (rebuttable presumption) 15

16 US Citizens Living in Canada US Client Married to Canadian Spouse No rollover for US estate tax purposes (must be US citizen spouse) o Unless QDOT Income Tax Treaty helps: o With marital credit US citizen can shelter approximately 10.5 million from US estate tax 16

17 US Citizens Living in Canada US Client Married to Canadian Spouse Article XXIX-B par. 3 of the Treaty to qualify for credit: o Deceased is citizen or resident in Canada or US o Spouse is resident in Canada or US o If both are residents of the US, one or both was citizens of Canada, and o Elect benefit of this paragraph and waive entitlement to marital deduction (no QDOT) 17

18 US Citizens Living in Canada Planning for US Citizen Take Advantage of Gifting! Gift up to $5.25 million under current exemption o To Canadian spouse file US gift tax return Protects $5.25 million PLUS growth on $5.25 million Adjust Canadian s will so assets pass to spouse trust if she dies first To family trust file US gift tax and GST return o Protects $5.25 million PLUS growth on $5.25 million o Creates dynasty trust to protect US citizen children from estate tax 18

19 US Citizens Living in Canada Insurance included for US estate tax purposes if US citizen has incidents of ownership Consider moving the insurance o Owned by Canadian spouse Canadian spouse must fund premium payments Watch US gift tax if moving existing policy Who owns if Canadian spouse dies first? o Consider ILIT 19

20 US Citizens Living in Canada Planning for Canadian Married to US Citizen Spouse Structure Will such that property inherited by the US citizen spouse can be protected from future US estate tax Create a spousal trust under Will for the inheritance. Also qualify for Canadian rules. Structured to keep assets out of estate: o No general power of appointment. Can t appoint assets to Herself Her creditors Her estate Her estate s creditors 20

21 Example: US/Cdn Couple Harry and Sally are married and live in Toronto Harry is a US citizen, Sally is Canadian Sally o RRSP of $100,000 o $2 million (expected inheritance) Harry o $10 million portfolio (gift from father) o RRSP of $100,000 Joint o Toronto home worth $1.5 million o Florida condo worth $400,000 21

22 Harry and Sally cont d What planning options are available? o Estate tax on Harry s assets over $5.25 million What should Harry s will provide? o Possible QDOT Other planning? o Annual gifts to Sally o ILIT What should Sally s will provide? o GOAL Avoid increasing Harry s US estate (use spousal trust) 22

23 Canadians Owning US Property 23

24 Canadians Owning US Property Canadians referred to as Non-resident aliens ( NRA ): o Taxed on FMV of US situs property owned at death o If worldwide estate < US$5.25 million No U.S. estate tax; otherwise, If U.S. assets < US$60,000 no U.S. estate tax May be increased under the Canada-U.S. Treaty Need to file estate tax return if property over $60,000 24

25 Death in 2013 ($5.25M) Cdn Owns US Real Estate Single Married Single Married Worldwide Estate $5,000,000 $5,000,000 $10,000,000 $10,000,000 Value of Property $500,000 $500,000 $500,000 $500,000 US Estate Tax $155,800 $155,800 $155,800 $155,800 Pro-Rated Credit ($204,580) ($204,580) ($102,290) ($102,290) Marital Credit ($204,580) ($102,290) Net Estate Tax NIL NIL $53,510 NIL Single Married Single Married Worldwide Estate $5,000,000 $5,000,000 $10,000,000 $10,000,000 Value of Property $1,000,000 $1,000,000 $1,000,000 $1,000,000 US Estate Tax $345,800 $345,800 $345,800 $345,800 Pro-Rated Credit ($409,160) ($409,160) ($204,580) ($204,580) Marital Credit ($409,160) ($204,580) Net Estate Tax NIL NIL $141,220 NIL 25

26 Canadians Owning US Real Estate Mr. Brown - married, Canadian resident & citizen o Purchasing Florida home for $1,500,000 o Total worth is $7.5 million o No other US assets o US assets account for 20% of Mr. Brown s estate Mrs. Brown - Canadian resident and citizen o No significant assets of her own US Estate tax before credits (2013 and after): $545,800 26

27 Canadians Owning US Real Estate Example Mr. Brown Owner US Estate Tax (2013) $ Mr. Brown s Death $0 Mrs. Brown s Death $136,640 Total Exposure $136,640 27

28 1. Tenancy in Common Structured such that each individual spouse owns 50% interest and only 50% interest included in estate tax calculation Can incorporate will planning to protect inherited 50% interest from US estate tax Watch structuring so that gift tax does not apply 28

29 2. Joint Tenancy Common ownership for smaller properties to avoid probate on the first to die Estate Tax Considerations o 100% includable at 1 st death unless prove otherwise o Tax on first and second to die Will Planning o Not possible since property does not pass through estate 29

30 3. Sole Ownership & Will Planning Create a spouse trust under Will to hold US real estate after death for benefit of spouse o Advantage to spouse trust is ability to eliminate US estate tax on second to die Option is ideal if US estate tax on first to die is nominal or less than tax that would arise on death in Canada o Spouse may be trustee of trust but ability to access capital of trust is limited 30

31 4. Spouse Ownership Mrs. Brown can purchase property to obtain larger credit o Does she have any funds of her own? o If not, Mr. Brown could gift cash to Mrs. Brown Possible US gift tax consequences Possible double income tax on sale of property May be a good option if there is no intention to sell property until the first to die hard to predict 31

32 5. Corporate Ownership Use of corporation used to be the most popular option No longer a good option! Shareholder benefit to shareholder for personal use of property o Shareholder is taxed on fair market value rent High income tax cost on sale of property o Corporate ~ 42% o Personal ~ 20% 32

33 6. Trust Ownership Mr. Brown establishes a Canadian resident discretionary trust o spouse and children as beneficiaries o Mr. Brown is not a beneficiary or Trustee of the Trust Mr. Brown must be ready to give the property away Mrs. Brown may be a trustee if discretion is limited watch terms of trust relating to income and capital! Mr. Brown gifts funds to the trust to allow it to purchase the property 33

34 6. Trust Ownership Considerations: If Mrs. Brown predeceases Mr. Brown o Continued use by Mr. Brown payment of rent 21 year deemed realization on trust property o Creating a foreign trust does not avoid the problem No annual income tax filing requirements On sale taxed in a similar fashion to individuals o After tax cash may be distributed tax free 34

35 7. Non-Recourse Debt Non recourse mortgage against property is a deduction for US estate tax purposes Arm s Length Non-Arm s Length o Commercial terms Discounted value if interest-free o Interest deductibility issues 35

36 8. Life Insurance Insure the US liability Cost of insurance v. ultimate estate tax exposure 36

37 Gifting US Real Estate - Tax Trap Many consider gifting property to children in order to avoid US estate tax since capital gains rate lower than US estate tax Watch for possible triple tax! Gift tax on gift of US real estate Tax in Canada at capital gains rate on accrued gain in property No foreign tax credit in Canada for gift tax paid Children s cost of property for US income tax purposes is parent s cost when sold will pay US tax on gain already paid in Canada with no credit 37

38 Non Compliant US Citizens 38

39 Non Compliant US Citizen Can US citizens still hide after FATCA? FATCA Foreign Account Tax Compliance Act Foreign financial institutions must register with the IRS by June

40 Non Compliant US Citizens Streamline process works for taxpayer who has resided outside of US since January 1, 2009 Tax returns show low level of tax liability approximately $1,500 or less each year Watch high risk factors of non acceptance such as: o Financial accounts outside country of residence o Material economic activity in the US Should taxpayers entered under old voluntary disclosures opt into the new process if they qualify? 40

41 What to do? What to do? Well I ll just give up my US citizenship or give back my Green Card? o Need to be aware of the new Expatriation Rules enacted after June 18,

42 tax experts Ian Macdonald Senior Manager, Human Resource Services T: +1 (416) ian.macdonald@ca.pwc.com Assistant : Jacqueline van Rensburg T : +1 (416) ext Ian Macdonald is a senior manager in s Human Resource Services (HRS) practice based in Toronto leading our Cross Border Private Client offerings. Ian has extensive experience advising clients on the cross border (including Canadian and U.S.) tax issues related to investments, incentive compensation plans and pensions, as well as the application of income tax treaties to prevent double taxation. Recently Ian has been involved in analyzing and applying the U.S. reporting rules, Passive Foreign Investment Company (PFIC) rules as they apply to Canadian Mutual Fund Trusts. He has also assisted taxpayers to file prior year tax returns under the voluntary disclosure programs and with reasonable cause arguments. Ian is a Chartered Accountant and a Certified Public Accountant, as well as a Certified Financial Planner in both Canada and the United States. He graduated from the University of Western Ontario and the University of Windsor, and is a seminar leader at the Canadian Institute of Chartered Accountants In-Depth Tax Course. 6/03/

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