George Steinbrenner, the former billionaire owner of the New York Yankees, is widely known as “The Boss”. This is a fitting moniker: Steinbrenner’s hands-on leadership style pushed the Yanks to win 7 World Series victories during his tenure, an accomplishment that undoubtedly made The Boss proud.
As if solidifying his nickname for all eternity, Steinbrenner passed away in July 2010, which, by U.S. tax measures, is a pretty good year to die; due to Bush-era legislation called the Economic Growth and Tax Relief Reconciliation Act of 2001 (the “Act”), U.S. estate tax has been repealed for the duration of 2010.
It’s safe to say that Steinbrenner showed the IRS who’s boss – he saved his heirs half a billion dollars by dying before the new year.
The Act increased exemption amounts periodically from its 2001 inception, so that by 2009, the effective exemption from U.S. estate tax was $3,500,000 USD, and by 2010, estate tax was eliminated.
The Act’s sunset clause is responsible for the return of U.S. estate tax in 2011, when it will cast a wide net.
As of January 1, 2011, the exemption for U.S. estate taxes will be only $1,000,000 USD. Rates will range from 39 per cent to 55 per cent (with a 5 per cent surcharge for estates over $10,000,000 USD and up to approximately $17,000,000 USD).
This means that if a Canadian passes away in 2011 owning U.S. assets worth more than $60,000 and the value of their worldwide estate exceeds $1,000,000 USD, they will be subject to U.S. estate tax on the U.S. assets only.
The scary part is just how easy it is to hit that million dollar mark; virtually everything is included when calculating worldwide estate values for U.S. estate tax purposes, from life insurance to RRSPs.
And even with the plummeting value of U.S. real estate, it’s almost a given that your U.S. assets will be worth more than $60,000 if you own even one U.S. home. When you consider that “U.S. assets” also includes shares of stock in U.S. corporations, it’s pretty clear that, as of 2011, the IRS is the new boss in town.
If you’re a Canadian whose worldwide value is more than $1,000,000 USD and you own U.S. assets worth more than $60,000 USD, but you’re not sure how much U.S. estate tax you would owe in 2011, you can check out our estate tax calculator now, which computes U.S. estate tax liability in seconds.
Despite much talk that the U.S. government would freeze the exemption level at $3,500,000 USD, or at least deal with the issue prior to 2010, Congress has not yet come to the rescue. So far, legislative attempts to prevent the exemption from returning to the low pre-2001 bar of $1,000,000 USD have been unsuccessful.
If Congress doesn’t take action in the next month, the number of U.S. estates affected by the tax in 2011 will be astronomical. According to the Tax Policy Center, 44,200 estates will pay a whopping total of $34.4 billion in U.S. estate tax.
While the number of Canadians subject to U.S. estate tax may not be quite as high, given the rising number of Canadians purchasing U.S. real estate, there are plenty of snowbirds that will be affected in 2011.
Knowledge is power. You don’t have to sit around and drown your sorrows in hot chocolate, shivering in the Canadian cold, waiting for Congress to act. Instead, you can pro-actively design an estate plan that will defer, reduce or eliminate your U.S. estate tax liability.
We use a variety of estate planning tools, ranging from Cross Border Trusts to Non-Recourse Mortgages and gifting strategies. If you or your client has an estate plan that was created in 2008 or earlier, or if you or your client doesn’t have a plan in place at all, I strongly recommend that you seek out the advice of a cross border specialist.
The fact that the 2011 law could change, doesn’t mean that it will. It’s always best to craft an estate plan with the current law in mind. For now, this means preparing for a $1,000,000 USD exemption.
Take charge of your estate plan today. You might not be The Boss, but you can be the boss of your finances if you do what it takes to plan for your family’s future. And that’s something to be proud of.