On Dec. 17, 2010, when US president, Barack Obama passed a
law governing tax on inherited wealth, most Canadian family
business owners probably didn't sigh with relief—but
in fact many had good reason to.
"It's remarkable how many Canadians don't realize
that if they have a child who is a US citizen or resident, US
estate laws apply to them," says Beth Webel, partner, tax
services, PwC. "There's a naivety and lack of
understanding about the US tax regime here. A US citizen or a
resident in the US is subject to an estate tax on everything they
own--their worldwide estate. In its simple form: if the person
dies, the US government values their estate and slaps a very high
tax on it based on that."
In a worst-case scenario, this can translate to a family-owned
Canadian business being ravaged by a US estate tax bill that it
cannot afford to pay. "For example, if the parent owners of a
family business pass away and leave shares in the business to one
of their children living in the US, when that child dies, the value
of the company is subject to US estate tax," says Webel.
Estate taxes south of the border over the years have ranged from
a whopping 35% on the total market value to a potentially
catastrophic 55%. "Typically, Canadian private company owners
understand there's capital gains tax at death here, so they
will get life insurance to cover 25% of whatever the gain is,"
says Webel. "But even if they realize that as a US citizen or
resident, they're going to have to get insurance to cover US
estate taxes and even if those taxes are at a 35% rate, the
insurance is going to be very expensive. And life insurance in the
US is typically taxed, so if you don't structure your life
insurance properly, you would subject that to a high tax rate as
well. There are cases of family businesses with children in the US
who simply can't get enough insurance. The cost of the
insurance is killing them because the estate tax exposure is so
significant on the assets."
The law US President Obama passed at the end of 2010 increased
the estate tax exemption to $5 million from $1 million and
decreased the top estate tax rate to 35% from 55%. "However,
this welcome relief expires at the end of 2012," says Webel.
"This was a temporary measure negotiated between the Democrats
and Republicans at the last minute. After 2012, the exemption will
be $1 million and the top rate 55% unless new legislation is
passed. While only temporary, it is helpful and it does provide an
opportunity to do some planning over the next two years. But come
2013, we're going to be back at the drawing board and if we
don't get a permanent fix, Canadian families affected by US
estate taxes will have to review their whole plan again."
Webel advises Canadian families with a child who is a US citizen
or who resides in the US ensure their tax advisor is very well
informed—and up-to-date—on US tax laws and that
they update and revisit their estate plans regularly. "It is
absolutely imperative that one, they identify US family members,
and two, they have frequent checks on their estate planning because
the US tax regimes keep changing and that might require more
frequent changes to wills and plans for these families," says
Advice for family business owners with children who are
US citizens or residents
The moment one of your children goes to live in the US, even
temporarily, inform your tax advisor. "Often, the child will
go to the US to pursue their studies, and then once they graduate
remain there," says Webel. "While they're in school
in the US doing their undergrad, that's the perfect time for us
to look at it and consider the options and plan ahead."
Don't assume anything: often people think that because
their child has dual citizenship, US estate tax laws will not apply
to them. They do. As well, even if the US citizen lives in Canada,
US estate laws also apply to them as well as to Canadians living in
Consider alternatives to insurance for the US estate tax
liability. Instead of passing assets to the child outright, pass it
to a trust created under your will that is specifically designed so
that the children are not viewed as the owners of the assets under
US estate tax law. Make sure the trust is properly structured
because if the US child has too much power in respect to that
trust, then the US government could tax all the assets of the
If you have a Canadian trust that's facing its 21st
anniversary—and is going to be distributing its assets to
defer taxes under Canada's "21-year
rule"—consider making the distributions to the
children living in Canada and finding other ways to equalize the
amount given to the US-based child.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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