By David S. Kerzner, Esq.[1]
In the 1970’s a Harvard law professor once testified before the United States Congress, “It is true, we do have an estate tax in this country, but only if you want to pay it.” I usually get a chuckle from a new client when I relate that story and that’s great because the client has come into my office to do cross border planning before it’s too late. Marcy Syms used to say, “at Syms an educated consumer is our best customer.” I will miss hearing her say that and will have to find another reason to visit Transit Road in Buffalo. But seriously, if my clients have one thing in common, it is this, they know when it comes to the IRS, an ounce of prevention is truly worth a ton of cure.
Unfortunately, far too often a family has not been proactive in regard to their U.S. investments. Not only real estate, but stock and investment portfolios too. Poor Judy’s dad passed away last year with a multi-million dollar U.S. securities portfolio. Much of it went to the IRS. Judy was furious. Even though her dad used a top investment firm, he never had any international tax planning, and Judy was in effect disinherited with assets her and her children could have benefited from. So terribly upsetting and unnecessary.
I am writing this brief note for this edition of It’s Personal in one of the most turbulent tax and economic times ever because there is a real opportunity for tax advisors and financial wealth managers to provide value to their clients by considering the feasibility of restructuring the ownership of the family property in the United States into a cross border trust. Typically title in these properties is currently held in the name of family members. Your clients are smart, they have RRSPs, wills, insurance. Now is the time for them to protect their U.S. second home. Very briefly, below are some of the potential benefits of using a properly structured, implemented, and operated cross border trust. The broader subject of cross border estate planning (Canadian and U.S. tax) is dealt with in our book, the Tax Advisor’s Guide to the Canada-U.S. Tax Treaty, published by Carswell, see for example chapters 29B (Taxes at Death) and 6 (Real Property).
Save U.S. Estate Taxes. One of the key benefits of using a trust is to save on U.S. estate taxes. The U.S. imposes an estate tax on the gross value of real property located in the United States owned by residents of Canada and other non-resident persons. Unfortunately only a unified credit exempting $60,000 from U.S. estate tax is available. Generally, the tax treaty between Canada and the U.S. provides a “unified credit” which equals the unified credit allowed to U.S. citizens multiplied by the fraction of the decedent’s total worldwide gross estate in the U.S. There is a lot of misleading information in the media that if your net worth is below $5 million (the current exemption level), you face no estate tax exposure. This is only valid if you die in 2012. The top estate tax rate goes to 55% and the exemption is reduced to $1 million in 2013.
Save on U.S. Gift Taxes. If you read It’s Personal Volume 4 Issue 2 (May 2011) my article, “A Potpourri of Errors Not to Make in Owning Your U.S. Vacation Real Estate” you will see how easy it is for a family to unwittingly gift half of their home to the IRS through bad planning, such as intra family transfers.
Avoid Risk of Liens and Forfeitures. Many families owning property jointly have had one spouse die (years ago) but have never filed and paid federal and local taxes (where applicable). Accordingly, there may be federal and state tax liens on the property. Such taxes, penalties, and interest can not only erode the equity in the property, but also make it unsellable to prudent purchasers using a competent attorney to assist them.
Reduce Professional Fees. Do you think having to pay for cross border tax and compliance advice and services when a family member dies is expensive? Try doubling the cost if title to the U.S. property is held jointly with another spouse.
Avoiding Hazards of Post Mortem International Tax Planning. Let’s be real, no one attaches the provisions of the treaty to a will. One family in Canada, acting on professional advice, recently put part of their estate into the U.S. voluntary disclosure program (in error). Don’t even ask. You cannot make this stuff up.
Other Benefits. There are many other benefits that can potentially be extolled, some of them are: creditor/spendthrift protection, avoiding stamp duties (or similar costs) on multiple transfers, planning for incapacity, premarital planning, avoidance of forced heirship rules, peace of mind.
Caveats. A couple of important caveats. Look before you leap. In any contemplation of a cross border restructuring of assets, a careful feasibility analysis should be undertaken to identify any Canadian, U.S., and State and Local tax, legal, or non-legal issues that need to be considered by the client and their advisors before acting. Educate your client. When Professor David Freeman of Queen’s law, one of Canada’s most distinguished experts on trusts and elder law, visits my course on business and succession planning he takes three hours to explain to my students what a trust is. In addition to the forgoing subjects, your clients need to understand what a trust is, how it operates, and whether or not, tax aside, it is a fit for them. Implementation is key and so is being practical, otherwise, it won’t work, and a lot of money will be wasted. This all takes time, which is why when a wealth manager from bank x calls and wants to know how much does a trust cost, I keep telling her, and other bankers practicing law is a process, not a product.
[1] David Kerzner, LL.M.(Tax) NYU, advises private businesses and families on investments into the United States from Canada in Toronto and New York City. David is Editor-in-Chief and Principal Co-Author of the Tax Advisor’s Guide to the Canada U.S. Tax Treaty, a two-thousand five hundred page commentary on Canadian and U.S. cross border tax law published by Thomson-Reuters-Carswell.
This article is for illustrative purposes ONLY and is NOT intended to be used for legal advice or as a substitute for timely and proper multi-jurisdictional and multi-disciplinary legal counsel.