For US expats living in Canada, as either permanent residents or dual citizens, careful estate planning takes on heightened importance. We say this with some reservation – because everyone should have a comprehensive and up-to-date estate plan – but the reality is that the unique tax consequences of retaining US citizenship while living in Canada do indeed require special consideration.
On top of the tax issues, your choice of estate planning tools also requires recognition of the differing legal regimes that apply in the United States and in Canada. Simply put, a will or trust you create in the US may or may not be sufficient (and legally enforceable) to execute your final wishes in Canada. As a result, whether you are planning to move to Canada or have already relocated across the border, you need to carefully evaluate your estate plan to make sure it minimizes your estate’s tax liability and achieves your ultimate goals.
Question Number One: What Laws Apply?
While jurisdictional issues may seem beyond the scope of a traditional estate planning discussion, if you are a US citizen living in Canada, you will not be preparing a traditional estate plan. To address the cross-border tax issues and ensure the enforceability of your estate planning documents, you (or, more accurately, your lawyer) need to have a clear understanding of what laws apply.
In the US, estates and trusts are a matter of state law. This means that each state has its own laws that govern the establishment and effectiveness of wills, trusts, and other estate planning tools. Gift and estate taxes apply at the federal level, but of course there are certain state-level taxes that apply to income and property as well.
In Canada, it is a similar story. There are provincial laws, and then there are federal laws. Of course, these laws are different from the laws in the US, and in fact Canada has a “death tax” regime that is entirely different from the estate and gift taxes that apply south of the border.
Tax Planning for US Citizens Living in Canada
Understanding the Canadian “Death Tax”
So, about Canada’s “death tax.” As a resident of Canada, when you die, your estate will be subject to tax on what is called a “deemed disposition.” This has to do with the concept of capital gains. During your lifetime, in both the US and Canada (though, again, subject to varying specifics), when you sell an asset like a stock or piece of real estate, you are required to pay a capital gains tax on any appreciation in the asset’s value from the time you bought it to the time it was sold. This is an oversimplification, but it illustrates the general concept.
In Canada, upon death a person’s assets are treated as if they have been sold (a “disposition”). As a result, subject to various exceptions, his or her estate becomes liable for any tax that would have been due in the event of an actual sale. Capital gains are taxed in Canada at both the federal and provincial level.
In the US, on the other hand, in most cases the first $5.45 million of a person’s estate is exempt from taxation. So, if your estate is worth $6 million, only $550,000 is potentially subject to estate tax in the US – and there are planning techniques to avoid this liability. Importantly, while the tax treaty between the US and Canada allows for dual tax obligations to be offset under certain circumstances, once again, astute planning is critical to help your loved ones retain as much of your estate as possible.
Yes, Canadian Residents Still Have US Tax Obligations
If you are surprised to learn that you still have US tax obligations once you move abroad, you are not alone. Many people make the mistake of overlooking the federal government’s stronghold on US citizens, and as a result they either (i) get in trouble with the Internal Revenue Service (IRS), or (ii) leave their estates with tax burdens that are far greater than necessary. While you may not be able to avoid US taxes entirely while living in Canada, making sure you understand your obligations and address them to the greatest extent possible is a critical aspect of the cross-border estate planning process.
Non-Tax Considerations for Cross-Border Estate Planning
While tax planning takes on heightened importance for US citizens living in Canada, it is by no mean the only unique consideration when it comes to cross-border estate planning. Some of the additional important considerations include the following:
1. Where is Your Property Located?
For a variety of reasons, the location of your property matters. From the selection of your estate planning tools all the way to import-export considerations, the “situs” of your assets can play an important role in defining the structure and content of your plan. Keep in mind, we’re not just talking about property in the US and Canada. If you have real estate elsewhere or have stored property overseas for purposes of asset protection (as many international travelers do), you will need to be sure to specifically address these assets in your estate plan as well.
2. Will Your Estate Plan Be Effective Across the Border?
If you executed a will in the US, will it cover your assets in Canada? What about vice versa? Remember what we said about the importance of determining which laws apply. In many cases, it will make sense to prepare different estate planning documents for the US and Canada – not only to address “situs” issues, but to avoid other potentially undesirable consequences as well.
For example, in the US certain types of trusts serve certain, specific purposes (which in many cases are tax-related). If you have set up a trust to protect your assets or limit your US estate tax exposure, will this trust be equally effective in Canada? Maybe. Maybe not.
3. Can You Avoid Probate in Both Countries?
If you have assets in the US and Canada, you are probably going to want to plan your estate so that it allows your loved ones to avoid the probate process. Probate is time-consuming and expensive, and the time and expense multiply when your loved ones are forced to deal with probate in multiple countries (or even in multiple states or provinces). Depending on how it is structured and the assets you put into it, a trust that serves to avoid probate in the US may or may not have the same effect in Canada. In most cases, probate is something that can – and should – be avoided, you just need to plan accordingly.
Get Started on Your Cross-Border Estate Plan with Jiah Kim & Associates
It is never too early, or too late, to get started on your estate plan. If you are planning a move to Canada, we encourage you to address your estate plan before you go. If you are a US citizen living in Canada currently, we can review your estate plan and make any necessary adjustments to ensure that your final wishes will be carried through. To schedule an initial planning session with an experienced international estate planning attorney, please call (646) 389-5065 or schedule a consultation online today.
This blog post is written for educational and general information purposes only, and does not constitute specific legal advice. You understand that there is no attorney-client relationship between you and the blog publisher. This blog should not be used as a substitute for competent legal advice from a licensed professional attorney in your state.