Tag: U.S.

19 Jul

A Tale of Two Countries – Trusts in the U.S. and Canada

Suzana Popovic-Montag Beneficiary Designations, Estate & Trust, Estate Planning, Hull on Estates, In the News, Uncategorized Tags: , , , , , , 0 Comments

They love football, we love hockey. Their zee is our zed – and their Trump is our Trudeau. While we share a common border with the U.S., there are many differences between our two nations – and the reasons for setting up a trust can differ significantly by country as well.

The U.S. has a high estate tax for wealthy individuals – up to 40% on assets, with the first $5.5 million or so exempt. Not surprisingly, trusts are used aggressively in many situations to reduce estate values and minimize this estate tax as much as possible.

In Canada, there is no estate tax per se – although there is an estate administration tax (probate fee) in some provinces and there are often taxes payable on capital gains. But with no capital gains taxes on principal residences, the need for trusts as part of U.S.-style estate planning simply isn’t there.

This doesn’t mean that trusts aren’t a valuable planning tool in Canada. They can still be used to shift income from higher-taxed family members to those in lower tax brackets, or to provide dedicated funding for dependants, such as a disabled spouse or child, or as means of creditor protection amongst many other reasons. But there’s a kinder, gentler push behind trust planning in Canada, owing to the less punitive (in most cases) taxation of estates here.

This Globe and Mail article provides a good overview of the many potential uses of trusts in Canada today, and why a more aggressive approach isn’t needed here: https://www.theglobeandmail.com/globe-investor/personal-finance/a-tax-tool-thats-not-just-for-trust-fund-babies/article22996097/

The complexities of cross-border beneficiaries

Trust issues can be clean and tidy in Canada and the U.S. when everything about a trust stays fully north or south of the border. But what happens when trust worlds collide?

In short, it can get complicated, and specialized planning is often needed to avoid additional taxation. While avoiding a cross-border trust arrangement is one way around these issues, avoidance isn’t always possible, such as when a Canadian trust is settled with a Canadian beneficiary, but that individual moves permanently to the U.S. and becomes subject to U.S. tax laws.

This Collins Barrow advisory offers a more detailed discussion of some of the cross-border issues relating to Canadian/U.S. trusts: http://www.collinsbarrow.com/en/cbn/publications/u.s.-citizens-and-canadian-trusts.

Thank you for reading … Have a great day!
Suzana Popovic-Montag

20 Sep

U.S. Inheritance Tax Deductions for Surviving Spouses

Nick Esterbauer Estate & Trust, In the News, Wills Tags: , , , , , , , 0 Comments

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.

Inheritance Tax
“In the United States, inheritance tax is payable on the value of assets beyond an initial $5.45 million exemption.”

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.

Nick Esterbauer

23 Sep

Future Changes to U.S. Estate Tax?

Hull & Hull LLP Estate Planning Tags: , , , , , , , , 0 Comments

Yesterday I wrote about Edward Kennedy – I began to wonder about the tax implications on his estate.

Assuming he held $75 million in assets, his estate would have been taxed at a rate of 45% and the bill owing would be $33,750,000. But this is unlikely because much of his wealth was held by trusts which, in Ontario, are separate taxable entities. 

My colleague, Sarah Fitzpatrick wrote in July 2008 about the upcoming changes to the U.S. tax law.  That time is four months away. Congress must act soon; if it does not, taxes on nearly everyone will soar under a plan enacted in 2001 called the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) which provides that in 2011 the tax law that had been in effect in 2000 will reappear.

The estate tax is set to vanish for a year if nothing happens before the end of 2009 as the EGTRRA sunsets in 2010. In 2011, an effective rate of 55% on estates would come into effect.

Only a small number of individuals pay the estate tax each year. In 2007, there were 36,458 estate tax filers – out of 235 million total tax filers that same year in the United States.  . Smaller estates (under $3.5 million) make up the bulk of filers – over 60 percent in years 2002-2007. Large estates (over $10 million), however contributed between 18 and 30 percent of the total revenue in the same time frame.

During the 2008 campaign, President Barack Obama supported permanent extension of the 2009 law – effectively a permanent 45 percent top rate with $3.5 million exemption per individual ($7 million for couples).

Either side of the political spectrum will present different numbers, but what seems certain is that if there is no legislative action in the U.S. in the next few months, 2010 will be a good year for estates. My bet is that the large loophole will be filled quickly, especially as the U.S. operates with a large deficit.

Thank you for reading. Please remember that Hull & Hull is hosting another breakfast seminar tomorrow morning.

Enjoy your Wednesday.

Jonathan Morse – Click here for more information on Jonathan Morse.

09 Sep

A “Lightbulb” Moment

Hull & Hull LLP Estate & Trust Tags: , , , , 0 Comments

"Your worth consists in what you are and not in what you have." — Thomas Edison

Considered one of the most prolific inventors in history, Thomas Edison held over a thousand U.S. patents in his name (click here for a full list of all 1,093 patents).  Incredibly, when awarded the Congressional Gold Medal in 1928, Edison’s work was valued at nearly $16 billion.

So how could the man who invented the phonograph, incandescent light bulb, motion picture camera, the stock ticker and the alkaline battery amongst others, possibly have died a comparatively poor man?  When he died in 1931, his estate was worth about $12 million, but most of this was buildings and equipment in his labs and factories.

In the January 1932 issue of Modern Mechanix, Remsen Crawford, biographer and personal friend, reported that Edison had revealed that his many patents never made a fortune for him, rather his income was primarily derived from his activities as manufacturer.  Edison went on to explain that U.S. government patent protection expires after 17 years, but in the case of such great inventions, someone always steps forward to challenge the real inventor’s right to his patent.  Edison spent a lot of money in court trying to establish his claims to his inventions.  In fact, Edison indicated that he spent more defending his patents in court than he had ever derived from them on a royalty basis.

As so eloquently summed up by his good friend Henry Ford:  "He was not a money-maker…his own portion was a mere nothing compared with the wealth he created for the world."

David M. Smith

 

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