Table of Contents
- Cross-Border Estate Planning
- Gifts and Generations Skipping Transfer
- Buy Life Insurance
- Create a Dynasty Trust
- Choose Assets that are Not a US Situs Property
- Physically Move Assets from the US to Canada
- Establish a Cross-Border Trust
- Have Multiple Wills
- Prepare a Notifying Document
- Take Advantage of Canada’s Bilateral Treaties.
- Keep Updating Your Will
- Take Advantage of the Exemption
- Calculation of US Taxes
- Bottomline
As if your government wasn’t enough to charge taxes, you may have to pay double estate taxes if you own assets across the border. Though mutual tax treaties exist between the US and Canada, if you do not undertake estate planning, your assets may see a colossal cut when your loved ones inherit them.
The estate tax is levied on the value of assets at the time of death, with rates that increase progressively, beginning at 18% and reaching a maximum of 40% for estates valued above USD$1 million.
The following discussion discusses strategies to manage US-Canada Tax issues for estate planning.
A. Cross-Border Estate Planning
- Gifts and Generations Skipping Transfer
Canadians who are not US citizens may be able to avoid US state taxes by simply giving away their property during their lifetime. Due to a certain exemption available on gifts, you may be able to save taxes and leave more to your heirs.
- Buy Life Insurance
Life Insurance money is tax-free. It can act as a great tool for paying off taxes incurred by other assets.
- Create a Dynasty Trust
A dynasty trust allows you to transfer your assets to it. So, at your death, the assets will not be your property; hence, no capital gains tax will apply.
You can nominate your children, grandchildren, beneficiaries, or future descendants who have not yet been born.
There are two ways to create such a trust. One is to make it during your lifetime, and the other is to leave a Testament to the extent of creating it.
- Choose Assets that are Not a US Situs Property
Instead of investing directly in US businesses, you should invest in Canadian investment funds such as mutual funds, segregated funds, or exchange-traded funds. Such funds can hold underlying investments in US securities and help you save a lot of taxes.
- Physically Move Assets from the US to Canada
It is a simple method. If you move physical or collectible assets from the US, such as artwork, antiques, jewelry or vehicles, you can easily avoid state taxes.
- Establish a Cross-Border Trust
The law in both Canada and the USA recognizes a cross-border trust. It lets your assets undergo only one probate rather than needing probate at two different places. Moreover, your assets will go directly to your heirs without delay.
Notably, the assets remain frozen during probate and estate administration and cannot benefit your heirs. So, establishing a cross-border trust is just the thing you need.
- Have Multiple Wills
It is beneficial for you to have multiple wills if, as a Canadian, you own assets in the USA. The reason is that some of your assets will need probate while others will not. Similarly, having multiple wills means your assets will have a separate will for a particular territory so that the probate process goes smoothly and your respective will conforms to the specific local laws.
- Considerations for having multiple wills
If you have numerous wills, make sure that those wills confirm each other and do not contradict each other.
It would help if you also made certain that all the wills conform to the local laws.
Moreover, you should include an explicit clause in the will that allows the other wills to exist.
Such a clause is called an irrevocability clause. Without such a clause, your latter Will shall contradict the previous one.
- Prepare a Notifying Document
You should prepare a document detailing all your beneficiaries and the location of your assets.
- It will allow your representative or executor to approach your beneficiaries and reach your assets' respective jurisdiction.
- Similarly, if you have any expert lawyers in mind, you can give directions or guidelines to your executor in that document.
- You should particularly include those experts who prepared your will and codicils.
You can also include instructions on how to execute your will.
- Take Advantage of Canada's Bilateral Treaties
The two countries have many bilateral treaties in place, which allow you to avoid double probate and payment of double taxation. They can act as a saviour for you to administer your assets in two different places with two unique state taxes. In this way, you will be able to claim a refund for your taxes incurred in one place.
- Keep Updating Your Will
You should ensure that whenever you procure new assets in a new country or when there is any relationship change within your family, you update your will to express your renewed desires and change the will.
- Take Advantage of the Exemption
If your worldwide assets are at most 12.92 million, you are eligible for a prorated unified credit for your assets in the United States. So ensure you mind the upper cap and do not exceed it, or manage your assets accordingly.
B. Calculation of US Taxes
The taxes can be high. So, undertake effective estate planning. If you have an estate of 50 million US dollars, the overall tax from one generation to the next will be 14.8 million dollars.
Similarly, a tax of 8.9 million dollars will apply from the second generation to the next.
Moreover, for the transfer from third generation to 4th, using the same calculation, the tax bill will be 5.3 million dollars.
As you can see, 60% of your estate will no longer be available by the time it reaches the third generation.
So, it is essential to employ specific strategies to make sure your loved ones have more of what you own.
Bottomline
Estate management is as complex as it is necessary. At all, what it is not is to be taken for granted. The US and Canadian tax authorities will not compromise and forgive a penny. So, if you lack state planning, it doesn’t go in your favour. So, plan today.