Beating the taxman through bequests, treaties and credits

Thursday, September 17th, 2015


While you cannot leave a property to your spouse without paying tax, there is an avenue available where a bequest can avoid the clutching hands of the U.S. Internal Revenue Service.

“A marital deduction is available for assets which pass to a spouse who is a U.S. citizen,” Robert E. Ward, J.D., LL.M., of Ward Chisholm P.C. “Generally, assets must pass directly to the spouse, either as a bequest or as a result of co-ownership – as tenants-by-the-entirety or as joint tenants with rights of survivorship. However, bequests to certain types of trusts for the benefit of a spouse may also qualify.”

For those Canadians who aren’t married to U.S. citizens – and there are quite a few of us – there is more than one way to skin a cat and avoid the U.S. estate tax.

“In order for a bequest to a non-citizen spouse to qualify for the marital deduction in computing the U.S. estate tax,” says Ward, whose background of expertise includes tax law, business planning, estate planning, international taxation and tax planning and foreign trusts, “the bequest must be made to a special type of trust that satisfies the requirements of section 2056A of the U.S. Internal Revenue Code – referred to as a “Qualified Domestic Trust” or “QDOT”).”

While taking this route will avoid the tax man – it will only do so for a short period of time.

“The marital deduction and the QDOT defer rather than avoid U.S. estate taxes,” says Ward. “In both cases, the assets passing to or in trust for the benefit of the decedent’s spouse will be subject to U.S. estate taxation when the spouse dies.”

The net estate is subject to U.S. estate taxes computed at rates of 18 per cent to 40 per cent under the current law.

But all is not lost.

There are credits which may reduce the tax due after the U.S. estate tax liability is computed on the value of the decedent’s assets net of deductions.

First, the estate is entitled to an estate tax credit for foreign taxes paid at the time of the decedent’s death (such as Canada’s tax on deemed dispositions at death).  Second, there may be special circumstances which give rise to special tax credits.

“For example, the decedent’s estate may include property received within 10 years of death which was previously subject to a U.S. estate tax,” says Ward. “Third, regardless of the availability of any other credits, the estate of every non-U.S. person who owns U.S. situs assets is entitled to an estate tax credit of $13,000.”

This results in an exemption of the first $60,000 of U.S. situs assets from U.S. estate taxation at the death of the non-U.S. person.

Also, there can be some relief from estate taxes provided by the Tax Treaty between Canada and the U.S. – but that can provide a false sense of security.

First, computation of the denominator is based upon U.S. estate tax principles (the total fair market value of the Canadian resident’s worldwide assets).

“The denominator will include not only the Canadian resident’s bank accounts, brokerage accounts, all forms of real and personal tangible property,” says Ward, “it will also include the death benefits payable under policies insuring the life of the Canadian resident, as well as the account balances in the retirement and savings plans of the Canadian resident, such as RRSPs, RRIFs, TFSAs, and RESPs.”

The numerator in the equation is the fraction is the total fair market value of U.S. situs assets owned by the Canadian resident.

Copyright © 2015 Key Media Pty Ltd

Comments are closed.