US ESTATE TAX ALERT
- Some of you are aware the US federal estate tax terminated, for one year, effective January 1, 2010. (i.e. under present law, an individual, including a nonresident alien, who dies on or after January 1, 2010, and before January 1, 2011, will not be subject to US federal estate tax).
- There is no change in the US law affecting the sale of US real estate by a nonresident alien -- i.e. US income tax (capital gains tax) and the "FIRPTA" withholding still apply.
- The termination of the estate tax was somewhat unexpected. It resulted from legislation enacted earlier in the last decade that was expected to be revised before January 1, 2010. The somewhat unexpected termination of the estate tax (for one year) has created considerable confusion amongst estate tax planning professionals - lawyers, accountants, financial planners, investment advisors, and others.
- There is a general feeling that the federal estate tax will be reinstated during 2010 and that it could be reinstated retroactive to January 1, 2010. In the event of reinstatement retroactive to January 1, 2010, there is controversy over whether the retroactive portion would be held unconstitutional by the US courts. In summary, the present status is obviously chaotic.
- Meanwhile, under the present law, the US federal estate tax will be reinstated January 1, 2011, under far less favorable rules than the law that existed during the calendar year 2009.
- This is one of those items that makes you want to stop for a moment and say, "Hmmmmmm". Perhaps, only for a moment, though.
- We will do our best to keep you updated.
Tuesday, December 7, 2010
US Estate Tax Update
Yesterday, President Obama and the Republican Congressional leadership tentatively agreed to work on draft legislation that would re-instate US estate tax January 1, 2011, with an "exemption" of US $5 million for US citizens and US domiciliaries and a maximum estate tax rate of 35%. The change would remain in effect for two years and the agreement would also extend the 15% maximum income tax rate on long term real estate capital gains for two years.
One result of the estate tax change would mean that Canadian residents that are nonresident aliens of the US would not be subject to US estate tax if their worldwide assets did not exceed US $5 million at the date of death, and they had made no prior US taxable gifts. Potential estate tax benefits would also apply to certain citizens or residents of Germany, the United Kingdom and certain other countries with which the US has an estate tax treaty.
Caveat - the agreement is only part of a wide ranging agreement on many other tax issues, the details of which must still be decided upon. Further, there is substantial regret amongst many Democrats in Congress that the President has agreed to the overall package of tax issues.
- Tuesday, February 1, 2011
- Latest Update
- US ESTATE TAX: 2011 AND 2012
- (Canadian Tax Highlights, a publication of the Canadian Tax Foundation)
- The Tax Relief, Unemployment
Insurance Reauthorization, and Job Creation Act of 2010 (Pub. L. no. 11-312),
signed into law on December 17, 2010 by President Obama, extends income tax and
unemployment insurance rate cuts, provides new payroll tax breaks, and implements
significant changes to the US estate tax.
- The statute increases the US estate tax
exemption—set to decrease to $1 million on January 1, 2011—to $5 million for
2011 and 2012. It also decreases the maximum estate tax rate—set to in-crease
to 55 percent—to 35 percent for 2011 and 2012. The estate of a decedent who
died in 2010 can choose to apply the 2010 rules (no estate tax and a carryover
of basis) or the 2011 rules ($5 million exemption and a stepped-up basis).
- The statute affects a Canadian
citizen and resident who is subject to US estate tax on US-situs asset holdings, because the US estate tax
exemption for a Canadian under the Canada-US
treaty’s 1995 protocol is based on the
exemption for a US citizen or resident. Under the protocol, a Cana-dian
citizen and resident is entitled to a prorated US estate tax exemption calculated
by multiplying the applicable US citizen’s estate tax credit ($1,730,800 on a $5 million
exemption) by the proportion that the value of the decedent’s US-situs assets is
of the value of the decedent’s worldwide assets. A marital credit under the
protocol, equal to the prorated credit, may also be available if a Canadian
citizen dies owning US-situs assets and leaves them to his or her spouse in a
manner that would qualify for the US marital deduction from estate tax if the survivor was a
Following are some examples that illustrate the rules.
- 1) Mr. C, a Canadian
citizen and resident, dies in 2011 owning worldwide assets totalling $5
mil-lion, including a $500,000 Florida condo. Mr. C’s US estate tax
liability of $155,800 is completely covered by his $173,080 prorated credit
- 2) Mr. and Mrs. C are Canadian
citizens and residents. Mr. C dies in 2011 with assets totalling $10 million,
including $1 million in USco shares. Mr. C’s US estate tax liability of $330,800 is reduced to $157,720
by his prorated tax credit of $173,080 ($1,000,000/$10,000,000 3 $1,730,800). If Mr. C
leaves his US-situs assets to Mrs. C in a manner that
qualifies for the protocol’s marital credit, his prorated US estate tax
credit is doubled, eliminating his US estate tax liability ($330,800 2 ($173,080 3 2)).
- 3) Assume that the facts are the
same as those given in example 2, except that Mr. C has $100 million
of assets, including $5 million of USco shares. Mr. C’s $1,730,800 estate tax is reduced to $1,644,260 by
his $86,540 prorated credit ($5,000,000/$100,000,000 3 $1,730,800) and is further reduced to $1,557,720 if the
$86,540 marital credit is also available.
- The statute reduces the US estate tax liability for a
Canadian who owns US-situs assets, but a
Canadian with significant assets should still plan to minimize his or her US estate tax exposure.
Moreover, the statute’s estate tax changes are effective only for 2011 and
2012. Thus, even if the protocol’s prorated and marital credits are sufficient
to eliminate a projected US estate tax liability in
2011 or 2012, a Canadian should still plan to minimize US estate tax exposure in the
face of the un-certainty about what rules will apply in 2013 and beyond.