Cross Border Video Series
Stacy and Dale thought they found the perfect solution to probate by adding their kids on to their title. Unfortunatly, by doing so they triggered a US gift tax.
David A. Altro advises the couple that a Cross Border Trust would have been a better solution, as it helps them avoid probate and the U.S. gift tax
Cross Border Video Series
Maggie and her husband bought a house in Naples for $500,000 and put the title in her husband’s name. After her spouse passed away, Maggie couldn’t sell her house as her estate was frozen, probate took over a year to sort out and cost her over $15,000 in fees.
David A. Altro explains how to avoid these problems, starting by putting the property in a Cross Border Trust which avoids probate fees in the future.
Cross Border Video Series
George’s mother is ill with dementia. He would like to sell her condo before she dies to avoid probate fees.
David examines the situation and informs George that his mother loses the right to sign any documents because of her dementia.
The best solution in this difficult situation would be to put the property in a Cross Border Trust and be a trustee. This procedure would would bypass the complicated and expensive alternative of ‘Guardianship’.
A while back a client came to see me with concerns about leaving the universality of his estate to his spouse in his last will and testament. Having been married once before, he was concerned that upon his death, should he bequeath the universality of his assets outright to his spouse, she may later remarry and bequeath through her own last will and testament, all or a portion of her inheritance to her second husband and possibly her new children, instead of to their children together.
I responded that such a scenario is a possibility as inheritance received by an heir becomes entirely their property with the right to use, enjoy, and dispose at their discretion. As a solution to his concern, I suggested he bequeath the universality of his estate into a testamentary spousal trust created in his last will and testament, designed to provide for the maintenance and support of his spouse, all the while ensuring that the remaining inheritance be passed on to his children at the time of his spouse’s death. A spousal trust would thereby allow my client to exercise significant control over how his estate would be used, and which heirs would ultimately benefit.
The spousal trust would provide that the surviving spouse would be entitled to receive all the income generated from the inheritance (hereinafter “Capital”) held in the spousal trust during her lifetime. Although no other person other than the spouse can receive, use or have the benefit of the Capital of the spousal trust during the surviving spouse’s lifetime, in consideration of my client’s concerns, I advised him that it was possible to stipulate certain restrictions which would limit his spouse’s ability to encroach or withdraw the Capital, such as either establishing an annual or lifetime limit or specifying criteria for authorized encroachment such as for matters related to health, emergency or educational purposes. Appropriate restrictions placed on capital distributions would assure my client that his children will receive the balance of the capital of the trust.
In addition to ensuring that my client’s wishes and intentions will be respected, a spousal trust also provides benefits that can reduce the income tax that his spouse will pay on the future income earned on her inheritance. Instead of inheriting assets directly and then being personally taxed on the income received from such assets at potentially the highest rates of taxation, a spousal trust would allow such income to be taxed in the hands of the spousal trust at the graduated marginal tax rates that apply to individuals. As a result of such “income splitting”, a spousal trust can provide up to approximately $11,000.00 of income tax saving per year!
Lastly, by leaving his spouse’s inheritance to a spousal trust, my client would provide creditor protection of the inheritance against claims from his spouse’s present and future creditors, including marital claims from a future divorcing spouse. With creditor protection in place, my client will once again exercise another degree of control over his estate by making sure that it ends up with his spouse and ultimately with his children and not with her creditors.
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On December 17, 2010, President Obama signed into law major changes to the U.S. federal estate tax. This newsletter is for your review. These changes offer opportunities for new estate planning. We encourage you to read the following and consider reviewing your existing estate plan.
David A. Altro, Managing Partner
B.A., LL.L, J.D, D.D.N, Fin.Pl., TEP
Florida Attorney and Quebec Notary
On December 17, 2010 the U.S. House of Representatives passed the “The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010” (“The Tax Relief Act”), which reflects the agreement of congressional leaders and President Obama. This legislation has now been signed into law by the President. Some of the highlights of the Tax Relief Act are summarized below however one key feature of the Tax Relief Act is its duration; the Tax Relief Act only lasts for two years. So all of these changes are fluid and subject to further Congressional debate and future changes.
Changes Impacting Estate Planning
Among other things, the Tax Relief Act includes the following important changes impacting estate planning:
First, the estate tax
has been retroactively re-enacted for those who died in 2010; however, the estate tax has a $5 million exemption (indexed for inflation from 2010 beginning in 2012) and a 35% rate. Estates of persons dying in 2010 can elect to be subject to “carryover basis” instead of the estate tax. The election must be made on a return filed within 9 months of the effective date of the Tax Relief Act. This essentially means that Personal Representatives can elect for the estate/trusts to: (a) be subject to the estate tax and receive a full step-up in basis, or (b) not be subject to an estate tax, but apply a carry-over basis for the decedent’s assets (subject to a limited amount of step-up), whichever the Personal Representatives deem most beneficial.
Planning Notes: This change in the estate tax law highlights three planning notes:
All Personal Representatives and all Trustees who have administered or are administering estates and trusts of decedents who died in 2010 must consult with their tax advisors/attorneys to review this new reporting requirement and their tax planning options.
With the estate tax exemption going up so significantly, all estate planning clients should review their estate plans as soon as possible. While many estate plans will work perfectly under these new rules, the $5 million exemption may frustrate certain clients’ planning intentions, particularly for clients with plans that include gifts to spouses or others (e.g. children from a prior marriage or grandchildren) based on formulas tied to the estate tax exemption – and virtually all plans for married clients are.
As a result, Canadians who own U.S. assets such as U.S. real estate and shares of stocks in U.S. companies held personally will not be subject to U.S. estate tax where their worldwide estate is less than $5 million at death. However, remember the new law sunsets in 2 years whereupon the exemption drops back down to $1 million unless there are new tax law changes.
Second, for U.S. residents the gift tax exemption remains at $1.0 million for 2010, but starting January 1, 2011, the gift tax exemption is re-unified with the estate exemption (i.e., the gift tax exemption increases to $5.0 million). In addition, the gift tax rate for 2010, 2011 and 2012 is 35%. This major increase in the gift tax exemption (coupled with the increase in the GST exemption – below) is extremely valuable to high net worth clients.
Planning Note: After January 1, 2011, clients should consider the benefits of making substantial gifts to multigenerational trusts for life (“dynasty” trusts) to lock in the gift tax exemption opportunity and shift assets, as well as the income and appreciation on those assets, out of their taxable estates.
This is extremely advantageous for Canadians whose child or children reside in the U.S. or are dual citizens.
Third, the Generation-Skipping Transfer Tax (“GST”)
has been retroactively re-enacted for 2010. While that sounds bad, the good news is the GST tax rate for 2010 is zero. This provision of the Tax Relief Act is actually helpful as it clarifies the GST consequences of transfers made by gift or from estates in 2010, and confirms those transfers are subject to all the rules that previously existed, but the rate in 2010 is zero. For example, for any clients who made taxable gifts to grandchildren or younger generations (or to trusts for them) during 2010, they now have the GST tax impact clarified – there will be no retroactive GST tax to pay. In addition, the Tax Relief Act clarifies that direct skip gifts in trust or "taxable distributions" in further trust for grandchildren in 2010 will incur no current GST tax and would not have the potential problem of having the GST tax apply to later distributions from the
trust to the grandchild. If clients have GST non-exempt trusts and are making distributions in 2010 or if clients are considering GST transfers in 2010, this clarification is helpful. Starting in 2011, the GST exemption will equal the gift and estate tax exemptions – $5 million. This increased GST exemption can be allocated to 2010 transfers or to 2011 or 2012 transfers.
Planning Notes:
The GST provisions of the Tax Relief Act provide valuable support for Personal Representatives and Trustees of 2010 decedents, who will have to file estate tax returns. Without this clarification, there was great confusion on how transfers from estates would be treated and reported for tax purposes.
The $5 million (increased) gift and GST tax exemptions available after January 1, 2011 offer many clients the opportunity to make substantial gifts to dynasty trusts for their families, and to make even more substantial loans or sales of assets to such dynasty trusts. For clients who have already made gifts or sales to dynasty trusts, the new exemptions offer opportunities to either add additional “seed” money to the trusts or to reduce the promissory notes they are holding.
Fourth, the Tax Relief Act offers portability
of the estate tax exemption between spouses if the first spouse to die does not use all of his or her exemption. However, the portability provisions offer several pitfalls. First, clients can only avail themselves of the exemption of their last spouse to die – i.e. they cannot “stockpile” exemptions from more than one spouse. Second, as a result of this “last spouse” limitation, it is possible that remarriage by a surviving spouse could cause the loss of the portability if the new spouse predeceases the client but uses his or her full estate tax exemption. Estate tax portability might help some couples who have not planned their estates, and it offers a full “step up in basis” on the assets at the 2nd death, but many clients who plan ahead will be better served by continuing to use Credit Shelter Trusts (“CST”), which have
a number of advantages over portability. Relying on portability does not leverage the estate tax exemption of the first to die; if assets appreciate and there is no CST, the appreciation is fully taxable in the surviving spouse’s estate. If the assets appreciate after the first death in a CST, the appreciation passes tax free to the family. Also, portability does not preserve the GST exemption of the first spouse to die as the GST exemption isn’t portable. This means that unless used during their lifetimes, a couple relying on portability can only exempt $5 million on death from the GST. On the other hand, by applying GST exemption to a CST after the first death, clients can ensure use of both spouses’ GST exemption, and exempt $10 million instead of $5 million for their families. Finally, without a CST, the assets the surviving spouse inherits will not be
protected from creditors or future spouses of the surviving spouse.
Planning Note: Based upon the reasons highlighted above, many clients will still benefit by using CSTs in their estate plans, and CSTs will still be recommended.
Fifth, to provide some leniency in recognition of the estate tax rollercoaster ride, the Tax Relief Act provides additional time for Personal Representatives and Trustees of estates of persons dying in 2010 to make certain elections and file certain returns. In general the deadlines for actions such as disclaimers and/or filing an estate tax return are extended until 9 months from the effective date of the Tax Relief Act.
Sixth, as noted previously, all of the amendments in the Tax Relief Act will sunset in two years (so expect another political battle – especially with a Presidential election in 2012).
Other Changes for Individual Taxpayers
Among other things, the Tax Relief Act includes the following other important tax changes for taxpayers:
The Tax Relief Act continues (at least through 12/31/2012) at the 15% long term capital gains rate which is applicable also to Canadian residents, which would have gone up to 20%.
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Estate Tax Exemption amount: $5,000,000* Tax rate: 35% Carryover basis: Option to |
Estate Tax Exclusion amount: $5,000,000* Tax rate: 35% Carryover basis: Not applicable |
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Gift Tax Exemption amount: $1,000,000** Tax rate: 35% |
Gift Tax Exclusion amount: $5,000,000** Tax rate: 35% |
*For Canadian residents provided they are not also U.S. citizens, the exemption amount of $5,000,000.00 is calculated on such person’s worldwide estate as of the date of death. All assets are included in such calculation, without limitation to RRSPs and life insurance.
**For U.S. residents
A special thanks to Jeff Baskies, attorney, for his valuable contributions to this newsletter.
Introducing the Cross Border Video Series We frequently receive questions and concerns from clients regarding cross border tax, estate planning, real estate, and immigration. In response, we have compiled a short video series with real life questions received from listeners of our radio show. Click here to watch as Managing Partner David A. Altro, Florida Attorney & Quebec Notary, provides advice, commentary and guidance in his well-humoured demeanor. Our most popular episodes include: You can also watch the videos on our Facebook Page, and share it with your friends. Join the conversation by leaving questions and comments on our Youtube page for our cross border attorneys! Recession, Robo-Signers, and Recalls Many Canadians looking to scoop up bargain Real Estate in Florida are finding themselves in a whole lot of hot water, instead of on the sunny beaches of their dreams. In fact many are now asking themselves “if we bought it…don’t we actually own it?” For many the answer, sadly, is no. We at Altro & Associates, LLP are often asked why an attorney is needed if a title company has been appointed in a U.S. real estate transaction. That same question was also asked by Sonja Kleiman, a paralegal at our firm. The present article will shed some light on why! A few weeks ago, I was contacted by a buyer we represented in a foreclosure closing in Florida and she was concerned about a recent report aired on CBC’s the National- In Depth & Analysis Report covering the Florida foreclosure fiasco, which raised a red flag for any Canadian who has recently purchased or is thinking of purchasing real estate in Florida. As real estate attorneys practicing law in the wake of the subprime mortgage crisis, Florida, a favorite getaway and even permanent residence for many Canadians, was hit by a tidal wave of bank foreclosure and repossession cases. Unable to cope with the overload, banks and realtors recruited any and everyone to push through paperwork as quickly as they could, foregoing proper title examinations, forging documents, or simply skipping key signatures, formalities and rubberstamping affidavits without properly verifying authenticity in an attempt to move what was rapidly becoming billions of dollars in stagnant inventory. Read more… Altro on the Radio Waves Listen to David A. Altro, Florida Attorney, Quebec Notary and Canadian Legal Counsel and host Matt Altro, CFP and Chief Operating Officer of Altro & Associates, most recent episode of "Dollars and Sense" on CJAD AM 800 .The Altros always deliever good humored and spirited discussions on legal issues related to cross border and domestic tax, estate planning and real estate. The next episodes are scheduled after the new year: • January 20, 2011 If you missed the recent live shows, you can download them in MP3 format from our website: Be sure to check out our expanded Radio Shows page on our website where you can listen to other previous shows, highlighted clips and submit questions to be answered on upcoming shows.
We Can’t All Be the Boss, or Can We? 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. Read more…
So Patriotism Just Isn’t Your Thing Many dual Canadian and U.S. citizens have toyed with the idea of renouncing one of their citizenships in order to remove themselves from a taxation system. As the United States has most recently passed new legislation, we will look at the U.S. taxation issues for U.S. expatriates.
This new legislation entitled The Heroes Earnings Assistance and Relief Act, the “Heart Act” or the “Act,” was signed into law on June 17, 2008 and applies to individuals who relinquish their U.S. citizenship or long term U.S. residency on or after June 17, 2008 and who meet any one of the following: a) have an average annual net income tax liability of more than $139,000 USD for the five (5) years preceding expatriation; b) have a net worth greater than or equal to $2,000,000 USD on the date of departure; or c) have failed to provide certified compliance with U.S. tax obligations for the five (5) years prior to expatriation. Despite the criteria mentioned above, there are however exceptions for certain individuals which would remove them from the implications of the Heart Act. Cross Border Planning Partners Workshops Experienced cross border professionals will conduct workshops in cross-border currency exchange, U.S. immigration after 9/11/01, and estate planning. We will provide you with strategies and information in an attempt to get the best of the Canadian and U.S. tax systems; take advantage of currency exchange rates; receive your Canadian RRSPs tax-free or nearly tax-free in the U.S.; find investments exempt from U.S. income taxes and withholding; and maximize Medicare benefits, just to name a few. General question and answer sessions will also be held to address your specific concerns. Wednesday, January 26, 2011 Tuesday, February 1, 2011 41-000 Bob Hope Drive Tuesday, February 8, 2011 Thursday, February 10, 2011 501 E. Camino Real To register for the above seminars please call 1-877-839-7111 or email Matt Altro at maltro@cbplanningpartners.com. Stay in Touch!
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Montreal, Quebec – November 25, 2010
November 25, 2010 David and Matt lead off the hour with an in depth look at what to consider when buying a property in the U.S., The conversations progressed when Matt opened the phone lines and listeners called to answer some skill testing questions. Technical questions about U.S. estate tax were addressed with winners receiving a copy of David A. Altro’s book ‘Owning U.S. Property the Canadian Way’. In closing, Matt touched on some of the issues for Canadians interested in moving to the U.S.
| Click here for part 1 |
| Click here for part 2 |
| Click here for part 3 |
Want to check out past shows or other radio content? View our Radio Shows page.
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.
