If you own assets situated in the United States it is important to consider how much foreign property may impact your broader estate plan. There are many issues that make U.S. situated property an asset for which specific planning is necessary. Among these issues are U.S. estate administration costs, probate fees and U.S. estate taxes.
U.S. Estate Taxes
For many Ontarians U.S. real estate is used primarily for leisure or to generate investment income. However, if you own real estate or other assets situated in the United States when you die, your family or heirs may have their inheritance substantially eroded by the U.S. estate taxes owing on those assets. Recently, the United States Congress re-implemented the estate tax system that expired in 2010. As a result, the American estate tax system can impose significant estate taxes on property located in the United States. The U.S. estate tax exemption amount in 2011 means that only wealthy Canadians who have a small proportion of their worldwide wealth located in the United States will likely be exposed to U.S. estate tax. However, many U.S. tax prognosticators expect today’s exemption level to drop significantly after 2012, depending on the composition of Congress and the political ideology of the President, which once again will make the U.S. estate tax a real concern for many Canadians. Even if your worldwide wealth is not significant, unless you plan to die in 2011 or in 2012, U.S. estate tax will likely be an eventual concern.
One way to escape U.S. estate tax is to transfer your U.S. property to a Canadian-resident trust prior to your death. Now is the time to consider this strategy as real estate prices in the U.S. have recently softened thereby minimizing the Canadian income tax consequences that such a transfer might otherwise create.
Foreign Administration and U.S. Probate
Transferring U.S. assets to a Canadian-resident Trust also allows your heirs to continue to enjoy the benefits of those assets without the hassle of administering a U.S. estate when you die. If you own U.S. assets in your personal name when you die, a U.S. probate court may need to be involved in order for control of those assets to be turned over to your executor. This process could be cumbersome and costly, especially if your executor is not a US resident. A foreign administrator’s insurance bond will have to be purchased by your estate and your Canadian Will (assuming you have one) would have to be first probated by a Canadian court then resealed by a U.S. probate court. There may also be foreign administrator’s fees and possibly U.S. estate taxes owing at the state level (apart from the U.S. Federal estate tax discussed above). For a Canadian-resident trust, these issues disappear.
If you own U.S. situated assets, be they real estate or other property such as stocks and bonds issued by a US company in a brokerage account, it is important to consider what protocol will need to be followed in order for your Canadian executor to gain control of your U.S. assets. Depending on the composition of your estate there may be an advantage to moving such assets outside your estate into a Canadian-resident Trust. Probate fees, estate administration expenses and legal expenses may be reduced or avoided and your executor may be more easily able to deal with your U.S. assets.
A trust is simply an alternate way of organizing the ownership of property. The registered owner of the U.S. property is called the “trustee”. The trustee need not be a trust company and could be one or more related family members. The individual who supplies the cash to buy the U.S. assets in the trust is legally known as “the settlor”. The trustee is under a duty to only use the trust assets for the benefit of the beneficiaries who are usually other family members. A qualified Canadian lawyer and U.S. attorney should collaborate to draw up the necessary trust documents, which will also include instructions on how the assets will be dealt with upon your death. Because the U.S. property will be legally registered in trust both before and after your death, the U.S. property will not form part of your estate.
The issues mentioned above are highly individualized; the degree to which they may apply to you are based on a number of factors such as the value of your U.S. assets, your worldwide wealth, family structure, age, location and use of the U.S. property, your citizenship and residency. The only common element that binds Canadians who own property in the United States is the need to plan one’s estate effectively.
ADAM D. CAPPELLI
Burlington (289) 635|7007 ext. 302
Toronto (416) 477|7007
Toll Free 1 (877) 684|1434
Burlington Office 855 Brant Street
Burlington, ON, Canada
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Toronto, ON, Canada