U.S. Estate Tax Certainty Begins in the New Year

By Terry F. Ritchie

Last Friday, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 was passed and signed by President Obama. Since U.S. lawmakers seem to like to use acronyms a lot, I thought I’d give this one a try myself. How does TRUIRJCA sound? Don’t quote me on that. Let’s just call it the 2010 Act.

As you recall from my previous article, “U.S. Estate Tax Uncertainty Still Exists” from last week, one of the more surprising elements of the new 2010 Act relates to the increased U.S. estate basic exemption of $5 million and lower maximum rate of 35%. This will – for at least the next 2 years – reduce the level of estate tax exposure for many Americans in Canada and those Canadians who own U.S. real estate or U.S. shares personally.

New Rate and Exclusion Amounts

The rate at which the 35% maximum rate kicks in is when the taxable estate exceeds $500,000. Based on the new maximum estate rate of 35%, the unified credit or “tax” on the basic exclusion amount of $5 million would now be $1,730,800. That would now be the number that would be utilized under the Canada-U.S. Tax Treaty to determine the pro-rated credit available for Canadians owning U.S. situs property.

I have put together a few hypothetical examples of the level of what the net U.S. estate exposure would be assuming various worldwide estate and values of personally held U.S. assets (like real estate or U.S. shares). As you will notice and as my previous article pointed out, the levels of exposure are substantially reduced – at least for the next 2 years – for single Canadians with a U.S. dollar worldwide estate of less than $5 million or Canadian married couples with a U.S. dollar worldwide estate of less than $10 million.

World Estate	$2.5M Single	$2.5M Married	$5M Single	$5M Married	$10M Single	$10M Married
US Situs Value	$500,000	$500,000	$1,000,000	$1,000,000	$1,000,000	$1,000,000
Estate Tax	$155,800	$155,800	$330,800	$330,800	$330,800	$330,800
Pro-Rated Credit	$356,160	$356,160	$356,160	$356,160	$178,080	$178,080
Marital Credit	N/A	$356,160	N/A	$356,160	N/A	$178,080
Net Estate Tax	NIL	NIL	NIL	NIL	$152,720	NIL

U.S. estate planning for a married couple where the surviving spouse will likely have a gross estate of greater than the basic exclusion amount will still be required to reduce or eliminate any U.S. estate at the surviving spouse’s death. This can be achieved through ownership planning (tenants in common) or through the role of a spousal trust within the first to dies will or other trust planning. Life insurance could also be used to cover estate exposure, however, special planning would be required to ensure that the proceeds would not form part of the decedent’s worldwide estate. Planning using a non-recourse mortgage – although hard to find – could also be used for U.S. real estate ownership.

Portability Provisions

One of the more interesting elements of the 2010 Act provides for “portablility” of the exclusion amount between U.S. citizen spouses. This allows the surviving spouse to elect to take advantage of the unused portion of the estate exclusion from the predeceased spouse’s estate. This should provide the surviving spouse’s estate with a much larger exclusion amount. This type of planning was typically achieved for U.S. married couples through the use of “credit shelter” or “bypass trusts” within wills in Canada or more often than not, Trusts in the U.S.

To give you an example of how this would work, let’s assume that John has an estate worth $3 million and his wife Ruth has an estate worth $4 million. Assuming that John dies in 2011, his estate would pay no U.S. estate tax ($5M exclusion exceeds his $3M estate). Ruth would now have an estate of $7 million ($4M herself + John’s $3M estate) Assuming that Ruth were to die in 2012 with an estate of $7M she would be entitled to use John’s unused $2 million exclusion along with her own exclusion of $5 million which would eliminate her exposure to U.S. estate tax. John would have had to make an election on his estate tax return to allow Ruth to use his unused exclusion amount.

Apparently, under the new law, if the surviving spouse is predeceased by more than one spouse, the exclusion amount available for use by the surviving spouse would be limited to the lesser of $5 million or the unused exclusion of the last deceased spouse.

Fun stuff. Well the fun begins again in another 2 years. As I ended my last article……Stay tuned!

Terry F. Ritchie is a Calgary and Phoenix based advisor with Transition Financial Advisors (www.transitionfinancial.com) who specializes in U.S./Canada financial, tax and estate planning matters. He is the co-author of the books, The Canadian in America, The Canadian Snowbird in America and The American in Canada (www.ecwpress.com).

Filed by Terry F. Ritchie, editor@Advisor.ca

Originally published on Advisor.ca

U.S. Estate Uncertainty Still Exists

By Terry F. Ritchie

Grandma still has time to get run over by a reindeer.

Could it be? An early Christmas present from President Obama and the U.S. Congress? Well, if the Democrats in the U.S. House get their way over the next few days, that present will be a little smaller.

So what am I talking about?

As many advisors are aware, based on U.S. laws passed in June of 2001, U.S. estate tax was repealed in 2010 and was expected to return at the beginning of the New Year with an exemption amount of $1 million and a maximum estate tax rate of 55%. If you recall, the rate in 2009 – prior to repeal this year – was 45% and an exemption amount of $3.5 million.

However, as part of the President’s efforts to resolve the uncertainty around increasing U.S. income and estate tax rates and laws at the beginning of the year, President Obama struck a deal with the Republicans which included provisions for the return of the U.S. estate tax at a maximum rate of 35% and a per individual exemption of $5 million.

Although Senators Jon Kyl (Republican from AZ) and Blanche Lincoln (Democrat from AR) had previously introduced the same exemption and rate as the President is proposing earlier in the year, they were defeated and no one (I mean NO ONE) expected these to be reintroduced as part of the President’s bipartisan deal.

As of this writing, Senate Majority Leader Harry Reid has accepted the new proposed Estate rate and exemption. However, House Majority Leader Nancy Pelosi is holding firm and looking for the 2009 rate and exemption amounts of 45% and $3.5 million.

We should have greater clarity of how things will shake out in the next few days and very likely before the end of the year.

Despite the increased exemption and lower rate than most advisors expected, there are some other interesting provisions that will likely be part of the new law.

What has been proposed is that the new rate and exemption will only be available for 2011 and 2012. Unless Congress makes these laws permanent before the end of 2012, the estate tax rate would return to 55% with a $1 million exemption on January 1, 2013.

The new estate tax exemption would include provisions for indexing beginning in 2012 – even though we still have uncertainty beyond 2012.

The new law will likely include what is referred to as “portability” provisions. This would be an interesting addition within the new law as it would now automatically allow the surviving spouse the ability to utilize the deceased spouse’s unused estate tax exemption. This would diminish or reduce the need to establish specific trusts often referred to as “bypass”, “credit shelter” or “A/B” trusts as part of the estate plan.

Lastly, the new law would unite the estate, gift and generation-skipping taxes with the same maximum rate of 35% and have the $5 million exemption apply for all three taxes.

In terms of those of us who have clients who are either U.S. citizens resident in Canada or clients where one of the spouses is a U.S. citizen, this could significantly reduce the level of U.S. estate tax exposure and planning requirements that they would traditionally face.

Further, for those Canadians who would be contemplating the purchase of U.S. real estate for investment or personal use purposes, the more complicated planning playing field might be reduced somewhat given that U.S. estate tax exposure would only exist if the single Canadian decedent’s worldwide estate was greater than U$5 million or U$10 million for a married Canadian couple.

Stay tuned……

Terry Ritchie, CFP (U.S.), RFP (Canada), TEP, EA, a Calgary-based cross-border financial planner with expertise in both American and Canadian tax regimes, and co-author of The Canadian Snowbird in America, The Canadian in America, and The American in Canada

Filed by Terry F. Ritchie, editor@Advisor.ca

Originally published on Advisor.ca