Are you a U.S. citizen
married to a non-U.S. citizen? Or, are you and your spouse both green card
and/or U.S. visa holders living in the United States?
If so, then you’ll want
to be aware of U.S. estate-tax rules that, without proper planning, can result
in an outsized tax bill.
Recently, we started
working with an American client who has a significant estate and lives and
works in the United States. His wife is a Canadian citizen and U.S. green card
holder, but not a U.S. citizen. The couple does not have kids.
In a recent tax-planning
session, our American client was shocked to learn that any gifts between he and his
wife may be subject to tax rates as high as 40%. The same high tax rate may apply
to any inheritance left by a deceased spouse to the surviving spouse. Our
client’s surprise was understandable, because the rules are very different for
couples who are both U.S. citizens.
Most Americans leave the
bulk of their estate to their surviving spouse, because most of it can be
transferred without tax consequences. In particular, under the “unlimited
marital deduction,” if a person leaves his or her estate to a spouse, there is
no estate tax on the transferred property, regardless of the size of the
estate.
Simply put, the IRS is
willing to wait until the second spouse dies before levying an estate tax.
Similarly, married couples are free to make unlimited inter-spousal gifts
without incurring gift taxes.
By the way, because of
the U.S. Supreme Court’s recent DOMA decision, same-sex couples can now join
heterosexual couples in transferring as much of their estate as they like to
their spouse, free of gift or estate taxes. The catch is that both spouses must
be U.S. citizens.
The IRS sees things
differently when it comes to transfers in which one spouse is not a U.S. citizen.
The “unlimited marital deduction” treatment does not apply to a foreign spouse
because the IRS is afraid the non-citizen spouse will move to another country,
thus avoiding U.S. gift and estate taxes altogether.
Without the availability
of the marital deduction, current law permits the first $5,430,000 (adjusted
for inflation) of assets to be transferred tax-free. In other words, an
inheritance left to a non-citizen spouse is subject to a 40% estate tax after
the $5,430,000 lifetime exemption is used up.
So what should you do if
you are married to a non-citizen and your estate is above the exemption threshold?
Let’s use our clients as
an example. The wife could become a U.S. citizen prior to the husband’s death. Or
they could establish a qualified domestic trust (QDOT). A QDOT defers the
estate tax until the death of the foreign spouse, and allows for an annual
income stream to be paid to her. Moreover, it can buy time for the surviving
spouse to acquire U.S. citizenship.
Gifting strategies can
also be used to transfer a certain amount of assets to the non-citizen spouse each
year (the 2015 limit is $147,000). This will gradually reduce the size of the
U.S. citizen’s taxable estate while protecting them from federal gift-tax
liability.
Alternatively, if
certain conditions are met, our clients can take advantage of the marital
credit under the Canada-U.S. tax treaty. This option, however, can’t be used in
conjunction with the QDOT deferral.
As our clients learned,
there are certain planning
strategies and legal structures that, if set up in
advance, can help cross border couples avoid losing up
to 40% of their wealth through unnecessary taxes.
If you would like more
information about this topic, or to discuss your own unique situation, please
contact us today for a confidential consultation.
www.cardinalpointwealth.com
Whether you are transitioning residency between Canada and the U.S. or you have already made the move, it is important to understand the benefits of a cross-border financial plan. Learn how Cardinal Point can help when holding investment assets or financial interests in the U.S. or Canada.
http://cardinalpointwealth.com/9-essential-elements-of-cross-border-transition-planning
cross border transition planning, canadian and us tax returns, tax and estate planning for us citizens, canadians with us real estate, canadians moving to the us, american residents moving to canada, tax and estate planning for canadians, immigration to the us
Comments
Post a Comment