10
US Estate and Gift Taxes
Up until now, we have discussed only one type of taxation in the United States — the income tax. There is another system of taxation in the US that is imposed on the gratuitous transfer of wealth from one person to another (gift tax), and from one generation to another (estate tax). This system of taxation is collectively called the federal transfer tax system and is composed of three taxes:
• A gift tax that applies to transfers that occur during one’s lifetime.
• An estate tax that applies to transfers after death.
• A generation-skipping tax that can occur either during one’s lifetime or after death and is applied when one attempts to avoid the gift or estate tax at each generation.
Without the gift tax, you could avoid the estate tax by giving your property away before you die. Without the estate tax, you could avoid the tax by giving all of your property away after you die. Without the generation-skipping tax, you could avoid the tax that would occur at the next generation by transferring your property to a third generation, typically your grandchildren. Therefore, it makes sense that these tax systems are unified in some way. The unification of the federal gift and estate taxes became effective back in 1976, and since that time, they have been sometimes referred to as the federal unified transfer tax system because the same tax rates are used to determine both estate and gift tax liability.
Note: The estate tax laws are in a state of confusion. The law that exists in 2012 is set to expire, and the law that existed in 1996 is scheduled to become the law again in 2013, if Congress does nothing. This would not be that confusing if we knew this would actually happen; however, nearly everyone believes that Congress will pass a law that will, more or less, retain the existing estate tax laws. Therefore, read this chapter for the big picture ideas and check with a cross-border estate planning expert before acting on any of the details in this chapter.
Note: When we talk about spouse throughout this book, we are referring to a heterosexual couple that has been married. At this time, the US (federal government) does not recognize same-sex or common-law marriages. This is true even if the state you live in does recognize these types of marriages.
In Canada, there is no estate tax, but there is a tax on death. Canadians are taxed on the capital gains that arise as a result of the deemed disposition of their capital assets at death. In many circumstances, the deemed disposition tax can be more expensive than the US estate tax because, as you may determine after reviewing this chapter, there are exemptions and credits that often significantly reduce any US estate tax liability. The US estate tax regime is complex, and we suggest that you seek the assistance of a good estate tax attorney and/or accountant whom is well versed in US international estate tax issues, when you are planning or administering an international estate.
We could devote an entire book on the US transfer tax system and how it relates to US citizens, green card holders, and nonresidents. This chapter is meant to be a brief overview of the system to acquaint Canadians on the subject of US estate and gift taxes.
The Internal Revenue Code is analogous to the Income Tax Act in Canada; it determines who is subject to transfer taxes using a different set of rules than is used for the income tax system. For income tax purposes, there are US persons (residents or citizens) and nonresident aliens (nonresidents that are also noncitizens). For transfer tax purposes, there are three categories of individuals: US citizens; US domiciliaries, which are resident aliens; and US non-domiciliaries, which are nonresident aliens.
A green card holder is, by definition, a lawful permanent resident of the US and is therefore taxed as a US resident until the green card is surrendered. This means that if you return to Canada and do not surrender your green card, you continue to be subject to the income-, estate-, and gift-tax laws of the US.
The tests that are used to determine tax residency for income taxes are somewhat different than those tests used to determine residency for transfer taxes. For transfer tax purposes, a concept of “domicile” becomes very important. Having domicile has nothing to do with the number of days you are present in the US. The number of days you are present in the US is the major test for residency, under the income tax rules. Domicile has to do with your intent. Your intent to live and stay in the US indefinitely determines your domicile. The concept of domicile is very subjective, yet very important because if you are deemed to be a US domiciliary, you will be subject to US estate taxes on your worldwide assets.
The IRS does not define the term “domicile” in terms of objective standards. Instead, there are Treasury (the IRS is an organization within the Department of the Treasury) regulations that provide a subjective set of tests based on one’s intent to remain indefinitely in the US. The regulations use factors such as the following:
• The duration of stay in the US and other countries.
• The frequency of travel between the US and other countries and between places abroad.
• The size, cost, and nature of the individual’s houses or other dwelling places and whether those places are owned or rented.
• The area in which the houses or other dwelling places are located.
• The location of expensive and cherished personal possessions.
• The location of family and close friends.
• The location of the person’s church and club memberships and where he or she participates in community activities.
• The location of the any business interests.
• Declarations of residence or intent made in visa or green card applications, wills, deeds, trusts, letters, and other documentation.
• Motivations such as the avoidance of the miseries of war or political regression.
• Visa status.
A noncitizen for income tax purposes may be considered to be a US domiciliary for transfer tax purposes.
The Treaty provides some further guidance and can be used to supersede the IRS rules for determining domicile. It provides that residency for estate tax purposes (domicile) is determined using the same methodology as used under the Treaty, if the deceased taxpayer’s estate is relying on the Treaty in calculating the estate tax.
If you are a US citizen or US domiciliary, you will be entitled to a lifetime unified tax credit that can be used to offset US estate and gift taxes. The credit is $1,772,800 and is based on a corresponding applicable estate exclusion of $5.12 million (in 2012). The credit is equivalent to the tax exclusion amount of $5.12 million. Thus, for a US citizen or domiciliary, he or she can have a net taxable estate of up to $5.12 million before any taxes would be incurred. Beginning January 2013, the exclusion amount is schedule to decline to $1,000,000 per person, plus an adjustment for inflation. After being adjusted for inflation, the exclusion is estimated to be approximately $1,300,000.
Beginning in 2011, if you are a US citizen, the amount of exclusion available to you is equal your basic exclusion amount plus the unused exclusion of your deceased spouse. The deceased spouse’s unused exclusion amount is only available if an election was made on the deceased spouse’s estate tax return, United States Estate (and Generation-Skipping Transfer) Tax Return (Form 706). The election can only be made if an estate tax return is filed. So, you may want to file an estate tax return, even if one is not required because the deceased person’s estate was not large enough.
The estate tax is calculated on your taxable estate, which is your gross worldwide assets that include the following:
• Life insurance proceeds payable to your estate or, if you owned the policy payable to your heirs.
• The value of certain annuities or pensions payable to your estate or your heirs.
• The value of certain property you transferred out of your estate within the three years before your death.
Less, allowable deductions, which include the following:
• Funeral expenses paid out of your estate.
• Debts you owed at the time of death.
• The value of property passing to your spouse (this is known as the marital deduction and applies to citizens only).
• Charitable deductions made from you estate to a qualified charity (most Canadian charities qualify, but are subject to a limit).
• State death taxes (a small number of states have a separate death tax).
The resulting number is your taxable estate, against which your estate tax is calculated. Once the tax is calculated a credit of up to $1,772,800 is applied. The credit is the tax that would result on a taxable estate of $5,120,000, the exemption for 2012, as noted above.
1. US Nonresident Estate Tax
There are many myths that concern Canadian residents when it comes to US estate tax. One is that the US will tax the Canadian resident on their worldwide estate. The truth is that the US will only tax assets that you own in the US. The other common myth is that the US will take half of everything. The truth is that the estate tax is a flat 35 percent on assets above the exclusion amount. The confusion comes from the fact that the top marginal estate tax rate was 55 percent. Even when the top marginal rate was 55 percent it was still only the tax after the exclusion and after you ran through the lower marginal rates. We discuss below how the nonresident estate tax really works for Canadian residents.
Canadians who are US non-domiciliaries and who own property in the US are subject to US estate tax on certain property deemed to be situated in the US. Under the Internal Revenue Code, the estate of a non-domiciliary, noncitizen of the US is subject to US estate tax only on specific US situs assets that exceed $60,000. Fortunately, the Treaty provides a two-part relief for this. The first relief is afforded through Paragraph 8, Article XXIX B, of the Treaty which provides that, for Canadians with gross estates that are less than US$1.2 million, the tax will only be on the gains of real property situated in the US and personal property that forms a part of a US business. The second relief comes from Paragraph 2 of Article XXIX B which grants a pro-rata unified credit to the estate of a Canadian resident decedent for purposes of computing US estate tax. The allowed pro-rata credit is determined by multiplying the US estate tax credit of $1,772,800 ($5,120,000 exemption of assets in 2012) by a fraction, the numerator of which is the value of the part of the gross estate situated in the US and the denominator of which is the value of the entire gross estate wherever situated.
In other words, a nonresident can generally have up to $60,000 of US assets before he or she would be subject to US estate taxes. However, the Treaty can be used to increase the $60,000 exemption by providing Canadians who are nonresidents and noncitizens of the US with a proportionate allocation of the $5,120,000 exemption allowed US citizens and domiciliaries. The exemption can never be less than the $60,000, so for smaller estates, a person can use the $60,000 exemption, allowed for under the Internal Revenue Code. For larger estates, a Canadian nonresident of the US can use the Treaty formula of US assets divided by worldwide assets, times $5,120,000.
For example, a Canadian resident and US nonresident and noncitizen, owns a condo in Arizona worth $250,000. That person has a worldwide net worth, including life insurance, of $1,500,000. That means that about 17 percent of the person’s assets are in the US and he or she can use 17 percent of the $5,120,000 exemption, or $870,400. Since the exemption ($870,400) is greater than the amount of assets in the US ($250,000), there is no US estate tax.
The estate of the person in the example above would have to file an estate tax return even though there is no estate tax due. Since the Treaty allowed for the extra exclusion, not US tax law, an estate tax return must be filed to make an election to invoke the Treaty provision. Without the benefit of the Treaty, the exemption would have been limited to $60,000. However, if the value of US assets is equal to, or less than $60,000, no return would have to be filed.
How do you determine what constitutes US assets, also known as US “situs property”? The rules for determining US situs property for a nonresident, non-US citizen are determined under the laws of the Internal Revenue Code; the treaty does not provide guidance in determining what does or does not constitute US situs property. US situs property includes personal property normally located in the US and includes such things as vehicles, jewelry, artwork, boats, RVs, furniture, and collectibles. Shares of US corporations, regardless of where they were purchased or where they are physically held and certain bonds and notes issued by US residents and corporations are also included, even if those securities are held in Canadian registered accounts. This includes shares of mutual funds and electronically traded funds issued by US companies. It does not include American Depository Receipts of foreign corporations, which are shares of foreign corporations listed on a US stock exchange. It includes interests in certain trusts if the assets in the trust have US situs. It also includes any business-related assets owned by a sole proprietor and used in a US business. Bequests to charitable organizations in the US reduce the US situs property.
Assets normally excluded from the numerator of the formula used for a nonresident include US bank deposits, proceeds of life insurance on the life of the decedent, and shares or notes of non-US corporations. In general, if interest from a debt instrument to a nonresident of the US is exempt from US taxation, the underlying debt obligation is likely to be excluded from the US estate. Code Section 2104(e) provides that the rule of estate tax inclusion does not apply to a debt obligation where interest would be treated as income from sources outside of the US for income tax purposes.
Neither the US income tax code nor the regulations specifically address the situs of partnership interests for estate tax purposes, and case law and rulings are inconclusive. It is reasonable to conclude that a nonresident alien’s interest in a US partnership, particularly if it is engaged in a US trade or business, will be included as US situs property.
Deductions for expenses and debts of a nonresident’s US estate are allowed, but only in proportion to the value of the US estate to the worldwide estate. For example, if the deceased nonresident has an outstanding loan for $30,000, and the US estate (not including the deduction for the loan) is $500,000 and is part of a worldwide estate of $1,000,000, then 50 percent of the loan would be deducted from the US estate. There is, in effect, an exception for real property encumbered by nonrecourse indebtedness. Because the debt is nonrecourse, if the real property is included in the US estate, then the entire indebtedness can be deducted.
All of the US estate property is combined, net of the calculation of encumbrances on the property, and is used as the numerator in the estate tax calculation for a nonresident Canadian in the US.
The denominator is the US non-domiciliary’s worldwide estate (or the “gross estate”). The IRS sets the rules for determining what is included in the nonresident’s worldwide estate. IRS Code Section 2031 defines the gross estate of a decedent as including “all property, real or personal, tangible or intangible, wherever situated.” It includes all of the assets that were used in the numerator of the formula, and it also includes interests in corporations, life insurance proceeds, and bank deposits including checking, savings, money market accounts, Guaranteed Investment Certificates (GICs), and Certificate of Deposits (CDs).
It includes the full value of Canadian-controlled private corporations which you control or have controlled and in which you still own shares, and the present value of all future payments you might leave to a spouse under the spousal benefit of your pension plan.
All investment accounts and all stocks and bonds owned in certificate form are included. Retirement accounts are included, such as US Individual Retirement Accounts (IRAs) and 401(k)s. It includes Canadian mutual funds, Canadian Registered Retirement Savings Plans, and Exchange-Traded Funds (ETFs).
Funeral expenses, administration expenses, debts, and claims against the estate are fully deductible from the gross estate. If property is located in a state that has a state death tax, there is an allowable deduction for any state taxes that you may incur from the federal gross estate. Charitable deductions made to either Canadian charities or US charities are deductible from the gross estate.
There is a special elective “marital credit” allowed by paragraph 3 of Article XXIX B of the Treaty for Canadian nonresidents. This credit is available for property that is transferred to a spouse who is a US or Canadian resident or a citizen of the US. The credit provides that the property transferred to a spouse will be credited against the deceased spouse’s gross estate (the denominator) and the US estate (the numerator). The credit that is allowed is the lesser of the unified tax credit and the US estate tax that would otherwise be imposed on the property. Thus, for most married Canadians who own property in the US, an estate tax would not become due until the death of the second spouse.
The treaty provides relief to a double taxation issue that, not so long ago, had been problematic for Canadians and US persons who owned property in both countries. For a nonresident of the US who owns property that is subject to US estate taxes or has a taxable US estate given the rules described above, any taxes incurred in the US either for US federal or state estate or inheritance taxes may be credited toward taxes paid in Canada on the same property for capital gains resulting from deemed disposition that occurs upon death. In other words, a foreign tax credit may be claimed against Canadian income tax otherwise payable on US source income on the deceased’s final Canadian tax return.
2. US Resident, Noncitizen Estate Tax
Generally, resident aliens in the US are afforded nearly identical estate tax treatment as US citizens, with certain exceptions. The Internal Revenue Code imposes a federal estate tax on the taxable estate of every decedent who is a resident or citizen of the US. The gross estate of each citizen or resident includes his or her worldwide property. The value of property which passes from a decedent to a surviving spouse who is a US citizen is deducted as a “marital credit” from the decedent’s gross estate.
The tentative estate tax owed is determined by multiplying the taxable estate by the appropriate rate tables, and in 2012 the highest marginal tax rate is 35 percent. Table 15 provides the unified transfer tax rates for gifts made and for deaths before applicable credits. The tentative tax is reduced by the unified tax credit. As mentioned earlier in this chapter, the unified tax credit is unified with both the estate tax and the gift tax. To prevent estate tax revenue loss through lifetime transfers, the gift tax system imposes a tax on inter vivos gratuitous transfers (i.e., made during one’s lifetime). The unified tax credit that is remaining to be used in the estate tax calculation is net of taxes paid during a person’s lifetime. Gift taxes will be discussed in section 3.
Table 15: GIFT AND ESTATE TAX RATE SCHEDULE
| 2010 – 2012 Gift and Estate Tax Rate Schedule | Tentative Tax Equals | ||
| Taxable Estate | Base Tax | Plus | Of Amount Over |
| 0 – $10,000 | $0 | 18% | $0 |
| $10,000 – $20,000 | $1,800 | 20% | $10,000 |
| $20,000 – $40,000 | $3,800 | 22% | $20,000 |
| $40,000 – $60,000 | $8,200 | 24% | $40,000 |
| $60,000 – $80,000 | $13,000 | 26% | $60,000 |
| $80,000 – $100,000 | $18,200 | 28% | $80,000 |
| $100,000 – $150,000 | $23,800 | 30% | $100,000 |
| $150,000 – $250,000 | $38,800 | 32% | $150,000 |
| $250,000 – $500,000 | $70,800 | 34% | $250,000 |
| $500,000+ | $155,000 | 35% | $500,000 |
| Credit shelter amount $5,000,000 in 2011, $5,120,000 in 2012 | Credit amount $1,730,800 in 2011, $1,772,800 in 2012 | ||
Under the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001, the estate and gift unified tax credit (and the corresponding exclusion amount) has varied wildly over the past ten-plus years, starting at a credit of $192,800 based on an exclusion of $600,000 in 2000, and increasing progressively until the estate tax was repealed for the year 2010. It was then reinstated based on a $5 million exclusion in 2011 that was increased, because of inflation, to $5.12 million per person, in 2012. Table 16 includes the unified tax credits and the corresponding exclusion amounts since 2001.
Not only have the unified tax credits and exclusion amounts varied, the tax rates and brackets have varied as well. At the end of 2012, barring Congressional action, the unified exclusion amount will revert back to $1 million per person with a top marginal tax rate of 55 percent. The $1 million dollars will be adjusted for inflation since 2000, and will end up being around $1.3 million after adjusting for inflation. Many people are holding their breath waiting for Congress to act, and most experts agree that there will be adjustments to these limits sometime in early 2013.
Table 16: UNIFIED TAX CREDITS AND EXCLUSION AMOUNTS
| Year | Applicable Unified Tax Credit Amount | Applicable Exclusion Amount | Top Federal Estate Tax Rate |
| 2001 | $220,550 | $650,000 | 55% |
| 2002 | $345,800 | $1,000,000 | 50% |
| 2003 | $345,800 | $1,000,000 | 49% |
| 2004 | $555,800 | $1,500,000 | 48% |
| 2005 | $555,800 | $1,500,000 | 47% |
| 2006 | $780,800 | $2,000,000 | 46% |
| 2007 | $780,800 | $2,000,000 | 45% |
| 2008 | $780,800 | $2,000,000 | 45% |
| 2009 | $1,245,800 | $3,500,000 | 45% |
| 2010 | No Federal Estate Tax | ||
| 2011 | $1,730,800 | $5,000,000 | 35% |
| 2012 | $1,772,800 | $5,120,000 | 35% |
While citizens and resident aliens are similarly subject to the estate tax, there are important distinctions that relate to citizenship. Direct gifts and direct bequests by a decedent to a noncitizen spouse do not qualify for the unlimited marital deduction. As part of this provision, gifts in trust that would otherwise qualify for a marital deduction will not qualify when the spouse is not a citizen. That is unless the trust meets certain requirements as a Qualified Domestic Trust (QDOT). A marital deduction is allowed if the property transfers to a QDOT.
There are two other circumstances when a marital deduction would be allowed for a noncitizen spouse of a decedent. The deduction is allowed if the surviving spouse becomes a US citizen before the decedent’s estate tax return is filed and has maintained US residency at all times after the decedent’s death and until becoming a US citizen. The deduction is also allowed for property passing directly to the surviving spouse if the surviving spouse irrevocably transfers the assets to a QDOT before filing the decedent’s estate tax return.
Most estate plans in the US for married couples with noncitizen spouses include QDOT provisions. A QDOT is a statutorily defined trust that permits married couples with at least one noncitizen spouse to take advantage of the marital deduction. The QDOT does not eliminate the estate tax; it merely postpones the tax until the death of the surviving spouse or other subsequent taxable event. The postponed tax always remains that of the first decedent spouse. A surviving spouse’s applicable exclusion amount cannot be used to shelter QDOT assets from estate tax. Also, the QDOT tax remains equal to the tax that would have been imposed if the amount involved in the taxable event had been included in the first decedent’s estate — at the tax rate that was in effect at the decedent’s death.
Note: The primary difference between the unlimited marital deduction allowed to a US-citizen spouse and the unlimited deferral to a non-US citizen spouse using a QDOT is that assets passed to a US citizen can be consumed before death and never have to be included in the surviving spouse’s estate. If that happened, there would be no tax due on those assets in the surviving spouse’s estate. With a QDOT, however, there is no chance of that; any distributions of principal from the QDOT triggers an estate tax.
The QDOT is designed to ensure that the property held in the trust will be subject to US federal estate tax, and the noncitizen spouse cannot flee the US with the assets and avoid taxation. The QDOT can be created by the deceased spouse’s executor post death or by the noncitizen surviving spouse to hold property he or she received outright from the decedent.
For a US tax resident or citizen who owns Canadian property, there is certain Canadian property that will become taxable in Canada at his or her death as a deemed disposition of capital assets. When a nonresident of Canada dies holding Taxable Canadian Property (TCP) the CRA deems the nonresident to have disposed of all of his or her TCP immediately prior to death for proceeds equal to the fair market value of the TCP at the date of death. TCP includes real property located in Canada, Canadian business property used in a business in Canada, or any stock owned in companies which have a significant portion of their fair market value in real property.
Because the US includes worldwide assets in the gross estate for US estate tax purposes, TCP will not only be taxed at death in Canada, it will also be part of the US gross estate. Under Paragraph 7 of Article XXIXB of the treaty, the US will allow a credit for Canadian deemed disposition taxes paid against US federal estate tax imposed on the Canadian property included in the estate of a US resident or US citizen, or upon the death of the surviving spouse holding a QDOT. The credit is allowed for any Canadian federal and provincial income taxes imposed at death as a result of property of the estate that was located outside of the US.
2.1 Jointly held property
The rules surrounding jointly held property become very complicated. Simply, the Code Section 2056(d)(1)(B) states that property owned jointly with right of survivorship between spouses will be included at one-half of its value in the estate of the first to die. This does not apply if the surviving spouse of the decedent is not a US citizen. Instead, 100 percent of the property is includable in the first decedent’s estate except to the extent the executor can substantiate the contributions of the noncitizen spouse to the acquisition of the property. Jointly owned US situs property will be fully includable in the estate of a nonresident alien who provided the funds to buy the property. Because jointly owned property with a right of survivorship passes outright to the surviving spouse, if the surviving spouse is not a US citizen, the surviving spouse will need to transfer the portion included in the estate to a QDOT in order to qualify for the marital deduction.
Joint ownership does not mean the same thing in the US as it does in Canada, so we recommend that you seek legal advice regarding titling and ownership of your US property.
3. Gift Taxes
US gift tax is imposed on taxable gifts (i.e., total gifts less exclusions and deductions) made by US citizens, US domiciliaries, and non-US domiciliaries. The treaty does not provide any provisions for inter vivos gifts (i.e., transfers made during a person’s lifetime). The rules for transfer taxes and filing requirements for lifetime gifts are dictated from US Internal Revenue Code. The gift tax system is laden with rules, exceptions, and exemptions.
Transfers from US citizens and domiciliaries are subject to gift tax on all transfers of property, regardless of where the property is located. Alternatively, non-US domiciliaries are only subject to US gift tax on transfers of real property and tangible personal property situated in the US. Gifts of intangible property, which includes stocks and bonds regardless of where they are located, made by a non-US domiciliary are not subject to US gift tax.
Transfers to spouses have gifting rules that are unique from gifting rules to non-spouses. To determine what tax consequences result from a lifetime gift, it is helpful to look at the direction the assets are flowing. If there is a transfer between spouses, and the flow is to a US citizen, then the transfer is generally free from any tax consequences and there is no limit on the amount that can be transferred. However, if the flow is to a noncitizen spouse, the tax law guards against that person’s leaving the country and avoiding the US government’s ability to tax the individual. For this reason, there are limits on transfers of US property that can be made to noncitizen spouses, whether or not they are resident aliens or nonresident aliens of the US. For a taxpayer with a noncitizen spouse, IRC Section 2523(i)(2) allows a $139,000 (2012) annual exclusion on gifts to a noncitizen spouse, which means he or she can only transfer assets to a noncitizen spouse of up to $139,000 per year. This can be problematic for married couples in creating joint gifts. As an example, assume a couple has moved from Canada to the US and is purchasing real property in the US. The money to purchase the property is coming from the husband’s personal account. The wife is not a US citizen. This will result in a gift to the wife equal to 50 percent of the value of the transfer amount, and if that gift exceeds $139,000, then there will be a taxable gift, and a gift tax return must be filed and gift tax will be due. The current marginal rate on gift and estate tax is 35 percent (the unified tax rate).
A more complicated example is what seems, at first blush, to be a harmless transaction. Instead of purchasing real property, the couple creates a joint bank account funded from an account owned by the husband only; this too is a joint gift. However, the creation of a joint bank account is treated differently from other joint gifts because the gift is not completed until the non-contributing party — the wife in this example — withdraws money for her own benefit. The reasoning is simple: The contributing party (the husband) could withdraw the money and use it for his own purposes because both spouses have access to the funds. In transactions involving joint bank accounts, a gift occurs only upon withdrawal by the non-contributing party for her benefit.
For gifts to anyone other than one’s spouse, any person can make an annual gift of $13,000 (2012) per donee to anyone, at no transfer tax cost, a long as the gift is of a present interest. All individuals, whether they are resident in the US or not, can gift, transfer-tax free, up to $13,000 per year to any donee (the $13,000 is referred to as the “annual exclusion amount” and is indexed annually for inflation). For spouses, gift splitting is available; which means that one spouse can be the donor but use the other spouse’s annual exclusion amount. However, if either spouse is a US non-domiciliary, gift splitting is not permitted. A gift can be a gift of a present interest or a gift of a future interest, and only present interest gifts will qualify for the annual exclusion. A present interest is an unrestricted right to the immediate use of the property.
Many Canadian residents, as well as US citizens and residents, who own property in the US, may want to add their adult children to the title of the property. If you are a Canadian resident and already own the US property, and you do not receive payment from the children for the value of their proportionate ownership of the property, there will be both Canadian and US tax implications. First, the CRA will consider this transfer subject to capital gains tax on the portion of the property being transferred. The IRS will consider the transfer of the US property as a gift. If you are a Canadian resident, however, and you do not yet own the property, you may be able to add children or other owners to the title as you wish without gift tax implications. For US residents and US citizens, adding the names of your children or other persons to the title would be considered a gift for US gift tax purposes unless market value consideration is paid for the assignment of ownership.
4. Generation Skipping Transfer Tax
We briefly want to mention the generation skipping transfer tax which is part of the transfer tax regime. This tax is imposed on transfers to unrelated persons who are more than 37.5 years younger than the donor or to related persons who are more than one generation younger than the donor, such as grandchildren and great grandchildren (known as “skip persons”). This additional tax applies to gifts made during one’s lifetime or bequests in an estate. The tax prevents someone from skipping tax on a generation by gifting directly to the next generation. Gifts to skip persons are taxed at basically double the unified tax rate for gifts and estates. There are exemptions, exclusions, and credits that follow similar rules to those for gifts and estates.
5. State Estate and Inheritance Tax
Just because you fall under the federal exemption of $5,120,000, does not necessarily mean you will not pay an estate or inheritance tax at death. As of this writing, 17 states and the District of Columbia have their own estate tax. Eight states have an inheritance tax and three states have both.
By this point you know what an estate tax is, but you are wondering what an inheritance tax is. An inheritance tax is imposed by states on the inheritors (beneficiaries) of the assets. All states that impose an inheritance tax allow assets to be transferred to a spouse tax free. Some states, but not all, allow assets to go to the children tax free. All states but one has a zero or nominal exemption from the tax, meaning that virtually every dollar is taxed; Tennessee has a $1 million exemption. See Table 17.
Table 17: STATE ESTATE AND INHERITANCE TAX
| State | Estate Tax (Exemption) | Inheritance Tax Percent |
| Alabama | N/A | |
| Alaska | N/A | |
| Arizona | N/A | |
| Arkansas | N/A | |
| California | N/A | |
| Colorado | N/A | |
| Connecticut | $2,000,000 | |
| Delaware | $5,120,000 | |
| District of Columbia | $1,000,000 | |
| Florida | N/A | |
| Georgia | N/A | |
| Hawaii | $3,600,000 | |
| Idaho | N/A | |
| Illinois | $3,500,000 | |
| Indiana | N/A | Yes (1% to 20%) |
| Iowa | N/A | Yes (5% to 15%) |
| Kansas | N/A | |
| Kentucky | N/A | Yes (4% to 16%) |
| Louisiana | N/A | |
| Maine | $1,000,000 | |
| Maryland | $1,000,000 | Yes (10%) |
| Massachusetts | $1,000,000 | |
| Michigan | N/A | |
| Minnesota | $1,000,000 | |
| Mississippi | N/A | |
| Missouri | N/A | |
| Montana | N/A | |
| Nebraska | N/A | Yes (1% to 18%) |
| Nevada | N/A | |
| New Hampshire | N/A | |
| New Jersey | $675,000 | Yes (0% to 16 %) |
| New Mexico | N/A | |
| New York | $1,000,000 | |
| North Carolina | $5,120,000 | |
| North Dakota | N/A | |
| Ohio | $338,333 | |
| Oklahoma | N/A | |
| Oregon | $1,000,000 | |
| Pennsylvania | N/A | Yes (4.5% to 15%) |
| Rhode Island | $892,865 | |
| South Carolina | N/A | |
| South Dakota | N/A | |
| Tennessee | $1,000,000 | Yes (9.5%) |
| Texas | N/A | |
| Utah | N/A | |
| Vermont | $2,750,000 | |
| Virginia | N/A | |
| Washington | $2,000,000 | |
| West Virginia | N/A | |
| Wisconsin | N/A | |
| Wyoming | N/A |
It should be clear to you by now that the international estate tax rules should not be taken lightly, and it is essential when dealing with an estate with both US and Canadian property, you should seek professional advice from an expert in this field. We covered the basics of the US estate tax implications, but our discussion merely brushed the surface of the issues that could be encountered in a multi-national estate. Furthermore, more than just tax implications need to considered such as estate, trust, and probate laws that must be adhered to for the proper administration of an estate. Note that the international estate waters are deep and treacherous.