Tag: Inheritance Tax
Few histories are as rich and riveting as the history of Ancient Rome, from the uncertain rise of the Roman Republic to the terrible civil wars that brought its ruin, and from the mad reigns of all-powerful Caesars to the eventual collapse of the Roman Empire, owing, generally, to invasions from without and corruption from within. Its history also shows us many of the roots of our legal traditions, including – as will be the focus of this blog – some precursors to modern-day estates law.
“It was customary with the Romans of that age, when they were moving into battle array, and were on the point of taking up their bucklers, and girding their coats about them, to make at the same time an unwritten will, or verbal testament, and to name who should be their heirs, in the hearing of three or four witnesses.”
Ontario’s Succession Law Reform Act only requires two witnesses for proper execution of a will (section 4), although soldiers on active service may proceed by writing their wills without witnesses (section 5).
In Ontario, we have instruments at our disposal to prevent or reverse dispositions tainted by incapacity. One may challenge an incapable testator’s will, or one may pre-empt abuse or needless loss with a guardianship application. In Ancient Rome, similarly, those individuals who attempted to give away everything they possessed (what we might call a “spendthrift” the Romans called a “prodigus”) were dealt with as though they suffered from a distemper of the mind.
Under Augustus – of whom it was justly said that he “made a desert and called it peace” – an inheritance tax of 5% was introduced (with some restrictions, such as that it applied only to well-off individuals). A little over a century later, the Emperor Severus increased this inheritance imposition to 10%. While these figures may seem high (or not high enough, depending on where you stand), they may be much lower than inheritance taxes elsewhere, such as in the United States, United Kingdom, France, Japan and South Korea. In Ontario we do not have an inheritance tax, but there are inheritance-like taxes, like capital gains taxes and probate taxes.
There is a marked difference between Ancient Rome and our common law system with respect to gifting between spouses. Unlike modern Ontario, wherein couples often use joint tenancy as a tax-saving estates planning strategy, Roman spouses were prohibited from gifting to one another. While the rationale for this law is moot, it was likely intended to keep apart the property of each spouse’s bloodline.
The Romans, as well as their civil-law descendants of today, operated under what has become known as “forced heirship”, whereby testators are legally required to give to their children. As a previous blog notes, in modern France, a parent with one child must give that child one-half of his or her property. In Rome, the historian Gibbon says that “if the father bequeathed to his son the fourth part of his estate, he removed all ground of legal complaint”. This is in stark contrast to the common law, in which testators may plan their estates with near-total freedom.
Thank you for reading and enjoy the rest of your day!
Suzana Popovic-Montag & Devin McMurtry
Many parts of the world remain under some degree of lockdown due to the COVID-19 pandemic. For older adults who may have limited access to assistance or company outside of immediate family during the pandemic, and/or whose transition to long-term care may have been delayed as a result, temporary relocation to live with supportive family members may be a suitable option.
As our readers know, inheritance tax is payable in respect of the assets of estates located in a number of jurisdictions, which do not include Canada. In the United Kingdom, for example, an inheritance tax of 40% is charged on the portion of an estate exceeding a tax-free threshold of 325 thousand pounds (subject to certain exceptions).
One way that some families choose to limit inheritance tax is to gift certain assets, in some cases a family house, prior to death, such that its value will not trigger the payment of inheritance tax. In the UK, if an asset is validly gifted at least seven years before death, inheritance tax will not be payable on the asset. However, where the donor of the gift reserves the benefit of the property – for example, if he or she continues to live at real property gifted to another family member – the gift will not be valid for the purposes of inheritance tax calculations.
A recent news article highlights the risk that older individuals in the UK who move back into previously gifted property during the pandemic may lose the benefit of potential inheritance tax exclusions by falling under the “gift with reservation of benefit” exception as a result of benefitting from continued occupation of the gifted property. While this risk may not outweigh the benefits of obtaining family support, it is a factor that a family may wish to consider as part of a decision to alter living arrangements.
Approximately 600 gifts have failed in the past several years, triggering up to 300 million pounds in inheritance tax in the UK. It is certainly possible that these figures will continue to increase as a result of shared family accommodations during the pandemic.
Thank you for reading and stay safe,
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I try to seize every opportunity I can to learn about art. In preparing today’s blog, I was intrigued to read about the UK’s Cultural Gifts Scheme and its relationship to estates.
The Cultural Gifts Scheme & Acceptance in Lieu allows UK taxpayers to donate important works of art and other heritage objects in return for a tax reduction, which includes inheritance tax. The donated work is then held for the benefit of the public or the nation at an eligible museum or gallery. According to this article from the Guardian, the Scheme was first introduced in 1910 as a way of allowing individuals to offset inheritance tax bills, and later, in 2013, to allow individuals to be able to make donations during their lifetime in order to offset future tax liabilities.
Any art admirer should have a look at the 2018-2019 Annual Report which provides a list of items that were received, along with some pretty pictures of the items :). It is a feast for the eyes and the senses. Some of the highlights include:
- a Portrait of the Emperor Charles V by Peter Rubens, which has gone to the Royal Armouries in Leeds
- a platinum and diamond necklace with black velvet ribbons, convertible to a brooch, made by Cartier in Paris c. 1908-1910, which has been allocated to the Victoria and Albert Museum
- 361 botanical drawings by the illustrator Florence Helen Woolward
- Bernardo Bellotto’s painting of Venice on Ascension Day, which settled £7 million of tax
- Damien Hirst’s Wretched War sculpture, given by the artist’s former business manager Frank Dunphy settling £90,000 in tax
In Canada, although art can be subject to capital gains, and possibly other taxes, it is possible for a donor to limit, or avoid the tax altogether, including by way of claiming a charitable tax credit. Individuals thinking about estate planning and/or donating art should seek the advice of a professional advisor to maximize the amount of savings.
Thanks for reading,
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Previous entries in our blog have covered inheritance taxes in the United States and other jurisdictions and President Trump’s proposed elimination of the tax altogether. Recent news coverage has zeroed in on how the family of the American president has allegedly evaded over half a billion dollars in tax liabilities that should have been paid on the transfer of significant family wealth.
Certain exceptions apply, but inheritance tax (more frequently referred to as “death tax” by President Trump himself) of 40% typically applies to assets of American estates beyond an initial value of $11.18 million. This means that estates up to this size are exempt from inheritance taxes, while the wealthy engage in complex planning strategies to minimize tax liabilities triggered by death (some of which mirror those used by Canadians in an effort to avoid payment of estate administration taxes on assets administered under a probated will).
Despite Trump’s previous statements that he has independently earned his fortune without reliance on prior family wealth, The New York Times reports that he and his siblings together received over $1 billion from their parents’ estates and that $550 million (55% under the old inheritance tax regime) ought to have been paid in taxes. However, in 1999-2004, during which years the estates of Fred and Mary Trump were administered, a rate of closer to 5% was paid in taxes. Whether the tax-minimizing methods used by the Trump family were legitimate or questionable remains unclear:
The line between legal tax avoidance and illegal tax evasion is often murky, and it is constantly being stretched by inventive tax lawyers. There is no shortage of clever tax avoidance tricks that have been blessed by either the courts or the I.R.S. itself. The richest Americans almost never pay anything close to full freight. But tax experts briefed on The Times’s findings said the Trumps appeared to have done more than exploit legal loopholes.
Sometimes, the line between legitimate tax-minimizing planning strategies and outright tax evasion can appear thin. It is important to avoid improper strategies that put the assets of an estate and their intended distribution at risk, and which may ultimately serve only to complicate and delay the administration of the estate.
Thank you for reading.
Apparently, the tax changes which were introduced in Japan in 2015 lowered the existing tax exemption threshold from ¥50 million to ¥30 million and reduced the existing deduction of ¥10 million for each heir to ¥6 million per heir.
As a result, the estates of a significantly wider segment of the population are now subject to inheritance taxes, and there appears to be a corresponding rise in the number of individuals seeking to reduce their tax burden through adoption.
According to the article, adoption for the sake of “financial adjustment” has always been a common practice in Japan. In fact, such adoptions, usually of adults who only need to be at least one day younger than the adopting parent, constitute the overwhelming majority of adoptions in Japan. In many cases, adults are adopted when a family does not have someone to take over a family business or a male heir who can carry on the family name. The article states that more recently, however, such adoptions appear to be motivated by the desire to reduce inheritance taxes.
The article refers to a recent case of the Supreme Court of Japan, in which the deceased had adopted his son’s son (his “grandson”), thus giving him four heirs instead of three — his son, his grandson (now second son) and two daughters. As a result, the son’s family stood to receive more of the father’s assets than either of the daughters. The daughters commenced proceedings seeking that the adoption be declared void as it had merely been intended as a tax-savings measure. However, the Supreme Court of Japan ruled that the intention to reduce the amount of taxes would not automatically annul the adoption itself and upheld the adoption, which many believe in effect, condones this practice.
This is not the first time adoption has been used in estate planning. Before same-sex marriage was legalized, adoption was used on occasion in Canada and the United States as a means of ensuring the transfer of an inheritance between same-sex couples. An article published in the New York Times in 2009, which outlines the use of adoption for such purposes can be accessed here.
Other Hull & Hull LLP Blogs & Podcasts that may be of interest to you:
- A novel argument by an adopted child in British Columbia
- Reducing probate fees
- The All Families are Equal Act Has Passed
Thank you for reading.
Just over a week ago, the Canadian Immigration and Citizenship website crashed following the conclusion of the U.S. presidential election. After hearing about this, I started to wonder, how difficult would it really be for Americans who are dissatisfied with the outcome of the recent election to flee to Canada?
Aside from entering the country on a student or work visa, certain individuals wishing to immigrate to Canada may apply for Express Entry as a skilled worker, caregiver, or a refugee. Americans with family in Canada may also be able to apply directly for immigration to a province through the Provincial Nominee Program.
Individuals qualifying for immigration to Canada who may be considering doing so should not neglect cross-border tax and estate planning issues that may result from their relocation before proceeding with such a move.
When moving from one jurisdiction to another, it is important that one takes extra steps to ensure that elements of existing incapacity and/or estate plans will be recognized in his or her new home.
If new Canadian residents own assets cross-border, it may result in difficulty in administering property during incapacity and/or following death. It is important that fiduciaries are chosen appropriately, so as to facilitate their access to assets in the relevant jurisdiction, without triggering cross-border tax issues and issues of inaccessibility. Depending on the jurisdiction, taxes may be payable with respect to foreign assets based on citizenship, residence, location of the individual or his or her assets, domicile, or any combination of these factors.
It is also important to remember that simply immigrating to Canada may not exempt U.S. citizens from the payment of American inheritance tax. As my colleague, Noah Weisberg, blogged last month, President Elect Trump has vowed to abolish inheritance tax altogether. However, Mr. Trump has proposed to replace current U.S. inheritance tax with what is being referred to as a capital gains tax that applies to assets of certain estates valued at $10 million or greater. At this point in time, it remains unclear which of the policies upon which the incumbent president’s campaign was based will ultimately be implemented.
Have a great weekend.
As we have previously discussed on our blog, the assets left behind by individuals who live and die in a number of jurisdictions other than Canada may be subject to an inheritance tax. For example, in the United States, inheritance tax is payable on the value of assets beyond an initial $5.45 million exemption.
Inheritance tax may not be payable on all assets inherited by one’s surviving family members. Tax-avoidance vehicles that are well known in Canada, such as joint ownership, inter vivos gifts, and trusts can be used in certain circumstances to limit one’s exposure to inheritance tax. However, fewer of our readers may be aware that a limitation may also apply to inheritance tax payments in respect of assets being passed on to a surviving spouse.
Sub-section 2056(a) of the U.S. Internal Revenue Code specifies as follows:
For purposes of the tax imposed by section 2001, the value of the taxable estate shall, except as limited by subsection (b), be determined by deducting from the value of the gross estate an amount equal to the value of any interest in property which passes or has passed from the decedent to his surviving spouse, but only to the extent that such interest is included in determining the value of the gross estate.
The application of subsection 2056(a) would typically result in the exclusion of assets passing to a surviving spouse from the calculation of inheritance tax. However, there are certain limitations to the marital deduction, which are described under subsection 2056(b) of the legislation. For example, the marital deduction may not apply if the surviving spouse’s entitlement in an asset is limited to a life interest.
Litigation recently emerged in respect of the estate of author Tom Clancy, who altered his estate plan by executing a codicil that had the effect of qualifying the share of his estate being left for his second wife and her child for the marital deduction. Clancy’s will established three trusts: (1) one for the benefit of his second wife, (2) one for the benefit of his second wife and their child together, and (3) one for the children of his first marriage. The children from Clancy’s first marriage argued that, notwithstanding the terms of the codicil, the marital deduction should not apply to funds held in trust for both Clancy’s wife and their child. If the second trust had not qualified for the marital deduction, the approximate $16 million in inheritance tax would have been deemed payable out of the assets of both the second and third trust, rather than exclusively borne out by the third trust. The result would have increased the total inheritance taxes paid (from approximately $12 million), but reduced the tax burden to be paid out of the share left for Clancy’s children from his first marriage. The matter proceeded to court in Maryland and it was determined (and upheld on appeal) that the codicil did, in fact, have the effect of qualifying the second trust for the marital deduction.
Thank you for reading.
President Obama has recently revealed plans to increase inheritance taxes payable by Americans with high-value estates. His proposal increases the tax rate applied to estates of sizes greater than $5,430,000.00 from 40% to 68% of the amount over the threshold. If implemented, this increased tax rate will make American estates the highest taxed in the world, surpassing Japan, South Korea, and France, currently with the top three inheritance tax rates worldwide, at 55%, 50%, and 45%, respectively.
The proposal for inheritance tax increases in the United States is inspired in part by a study conducted earlier this month by the Tax Foundation, which suggests that our neighbours to the south are currently earning half of what they were from inheritance taxation in the early 2000s.
The decreased revenue is attributable to the exemption of estates valued at less than $5.43 million from inheritance taxes and estate planning with a view to avoiding the taxation. The exemption threshold for payment of American inheritance taxes has increased significantly since the year 2003, at which time estate assets beyond the first $1,000,000.00 were subject to inheritance taxes.
However, reduced earnings may be a scenario preferable to the American government to what has been seen in thirteen other jurisdictions since the year 2000 – the abolition of inheritance taxes altogether.
In other regions, such as the United Kingdom, where inheritance tax is also applied, the issue of the tax is divisive. It has the potential to raise funds which may be used to accomplish important social objectives, but can also frustrate estate plans of the wealthy whose beneficiaries may not be able to afford to keep what has been gifted to them.
Inheritance tax rates of greater than 50% certainly make the probate fees payable by residents of Ontario seem relatively insignificant. When so much planning revolves around avoiding the payment of low Estate Administration tax rates, it would seem that many Canadians would object to the establishment of an inheritance tax regime. Further, the recent study by the Tax Foundation suggests that there may be less benefit to government funding through the implementation of inheritance taxes than might be expected.
Thank you for reading.