Decedent Estate Credit Card Debt

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Estate Planning
Presented by:
Greg Simpson, CA, CPA, TEP
Steve Peters, CA, CPA, TEP

September 17, 2007
        Cross-Border Estate Planning

• Overview of US gift and estate tax
• Legislative uncertainty
• Treaty relief
• Impact on Canadians (non-US citizens)
• Focus on identifying issues, avoiding traps


• US estate tax, gift tax and generation-skipping transfer
  (―GST‖) tax form a unified transfer tax system
   – Estate tax is imposed on property transferred at death
   – Gift tax is imposed on property transferred during one’s life
   – GST tax is designed to ensure that property does not skip a
     generation without a transfer tax being assessed
• Executor is personally liable for unpaid estate and GST


• US citizens and residents:
   – subject to gift, estate and GSTT on worldwide assets

• Non-resident aliens
   – subject to estate tax on assets situated in the US (―US
     situs property‖) and subject to gift tax on tangible assets
     located in the US

• Resident = domiciliary
• Tax rates begin at 18 percent and increase rapidly
  to 45 percent

            US Estate Tax—Calculation

• Estate tax is levied on the fair market value of assets
  transferred on death

                $ Estate
                                  _     Deductions

                 % Progressive        _
           X                                Unified
                   Tax Rate

                 =      Estate Tax Payable

        Repeal of US Estate Tax ?

• In 2010, the estate tax will be completely repealed
• No repeal of the gift tax is planned
• In 2011, the repeal sunsets. That is, unless there is
  new legislation in the intervening period, the law will
  revert back to legislation in effect for 2001
• Democratic Congress

       Estate and Gift Tax

          Estate Transfer   Lifetime Gift   Highest Estate
              Exempt           Exempt          and Gift
Year          Amount           Amount         Tax Rates

1981         $175,625        $175,625                    55%
1997         $600,000        $600,000                    55%
2004        $1,500,000      $1,000,000                   48%
2005        $1,500,000      $1,000,000                   47%
2006        $2,000,000      $1,000,000                   46%
2007        $2,000,000      $1,000,000                   45%
2008        $2,000,000      $1,000,000                   45%
2009        $3,500,000      $1,000,000                   45%
2010       Tax repealed     $1,000,000         35% (gift tax)
2011        $1,000,000      $1,000,000                   55%

Estate and Gift Tax Rates
                 US Federal Estate & Gift Taxes
                   (Unified Transfer Tax Rate Schedule)
                         For Tax Year 2007

    If Taxable Estate                       Tentative Tax Is
Is Over        But Not Over        Tax Is       Plus % Of Excess 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           750,000        155,800        37%        500,000
    750,000         1,000,000        248,300        39%        750,000
  1,000,000         1,250,000        345,800        41%      1,000,000
  1,250,000         1,500,000        448,300        43%      1,250,000
  1,500,000         2,000,000        555,800        45%      1,500,000
  2,000,000                          780,800        45%      2,000,000

      Decision Tree

                           Value of worldwide
  US citizen or      YES                         NO
                           estate > estate tax
  US resident ?
   NO                         YES
                           Subject to estate
  Hold US situs                 tax on
    assets ?         NO    worldwide estate           S
   YES                                                A
Value of worldwide                                    T
                     NO    Subject to estate          E
estate >estate tax
                              tax on US
                             situs assets

         Is Your Client a US Resident
• The Residency Test—is your client a US resident (domiciliary)
  for US estate tax purposes?
   – A resident is an individual who has his domicile in the US at the
     time of death. A subjective test—quite different from the (objective)
     substantial presence test to determine residency for US income tax
• Green card holders (lawful permanent residents) are often
  presumed to be domiciled in the US

            Gross Estate
            US Citizens and Domiciliaries
•   The gross estate includes the value of all property in which the
    decedent had an interest at the time of death
•   Life insurance proceeds will also form part of the decedent’s gross
    estate if the estate is a beneficiary of the insurance proceeds or the
    decedent had possessed certain economic ownership rights or
    ―incidents of ownership‖ in the policy

          Gross Estate
          Non-Residents of the US
• The taxable estate will include property situated within
  the US
   –   Real property located in the US
   –   Certain tangible property located in the US
   –   Shares of US corporations
   –   Debts of US persons including the US government (not
       including portfolio debt)
   –   Interests in partnerships carrying on business in the US
   –   US pension plans and annuities including IRA and 401(k)
   –   Look through rules for certain foreign trusts
   –   RRSPs

          Gross Estate
          Non-Residents of the US
• The following assets will not be included in the
  taxable estate:
   –   Shares of non-US corporations
   –   US bank deposits
   –   Portfolio debt obligations
   –   Life insurance proceeds

          Allowable Deductions

• US citizens and domiciliaries:
   –   Funeral expenses
   –   Estate administration expenses
   –   Debts of the decedent
   –   Mortgages and liens
   –   The marital deduction
   –   Charitable donations
• Non residents of the US:
   – Deduction is prorated by the ratio of the value of US situs
     assets to the value of the worldwide estate

        US Estate Tax Credits

• Non-resident aliens are allowed a standard credit
  (under US domestic law) of US$13,000 against
  estate tax otherwise payable, which exempts US
  situs estates of US$60,000 or less
• If US taxable estate is less than $60,000, it is not
  necessary to file Form 706NR with the Internal
  Revenue Service

        US Estate Tax for Canadians

• Canada – US Treaty provisions for Canadians.
   – US Relief
      • Enhanced Unified Credit
      • Special Marital Credit
      • Small Estates Exemption
   – Canadian Relief
      • Credit for US estate tax
   – No Relief For
      • US Gift Tax
      • GSTT

         Treaty Relief – Unified Credit

•   Article XXIX-B(2)
•   Applicable to Canadian residents who are not US
•   Pro rata share of unified credit available to US
    citizens, based on:
       (US assets) / (Total assets)
•   Effect: if total assets do not exceed estate tax
    exemption ($2,000,000 for 2007), no US estate tax

        Treaty Relief – Marital Credit

• Article XXIX-B(3)
• For property passing to spouse or spousal trust
• In addition to, and limited by, unified credit otherwise
  Maximum marital credit = Unified credit X 2
• Effect on death in 2007, if all property passes to
  surviving spouse or qualifying spousal trust:
   – Eliminate US estate tax if assets of decedent don’t exceed
     approximately $3.7M.

        Treaty Relief – Foreign Tax Credit

• Article XXIX-B(6)
• Applies to Canadian individuals and subs. 70(6)
  spousal trusts
• Credit against Cdn death tax for US estate tax on
  US-situs property
• No relief if no appreciation in value
• Does not apply to alter ego or joint partner trusts
  (Treaty rules predated Cdn legislation)
• Does it apply to US property held in RRSP?

 US Estate Tax Example—Facts

$10,000,000            Non-US assets
$ 2,000,000            US stock portfolio
$ 2,000,000            US residence
$     500,000          Mortgage on US residence
$       50,000         Funeral expenses

• All amounts are in US dollars

             US Estate Tax Example
                             US Person

Gross estate =                       $14,000,000
Deductions (expenses)
     • Mortgage    $     500,000
     • Funeral     $      50,000
         100%                            $    550,000
Taxable estate =                         $13,450,000
$13,450,000 x Tax Rate   =
                   Base Tax              $ 6,276,800
                   Unified credit        $ 780,800
                   Tax payable           $ 5,496,000

           US Estate Tax Example
                               Canadian Person

Gross estate (US situs assets)              =        $4,000,000
Deductions (expenses)
       Mortgage               $ 500,000
      Funeral                   $ 50,000
                                $ 550,000
$ 4,000,000 US Situs            =    30%
$13,450,000 Worldwide
                                                     $ 165,000
Taxable estate                  =                    $3,835,000

$3,836,430 x Tax Rate %
              Base Tax                           =   1,661,600
                 Unified credit (30%)                  234,240
                 Tax payable                         $1,427,360

        Canadian Ownership of US Real
• Individual Ownership
   – Low individual income tax rates
      • Maximum 15 percent (long-term) federal capital gains rates
      • No individual income tax in the State of Florida
   – High US estate tax

• Foreign Corporate Ownership
   – Canadian shareholder benefit problems
   – US corporate income tax rates
      • 34 percent federal plus state income tax
   – No US estate tax

         Canadian Couple Where One is
         US Citizen
• If US citizen dies first: limited marital deduction
   – Consider Qualified Domestic Trust

• If non-US citizen dies first: minimize assets
  included in estate of US citizen
   – Consider testamentary spousal trust which does not
     create ―power of appointment‖ for US purposes

        Power of Appointment

• For US estate tax purposes, assets of a trust are
  included in estate of a person who has certain
  powers, including:
   – power to invade principal
   – power to determine to whom assets pass

• Does not apply if power is limited by ―ascertainable
   – support in accustomed manner of living
   – maintenance in health and reasonable comfort
   – Canadian Spousal testamentary trust must meet this
     standard to avoid estate tax inclusion

         Power of Appointment - Scenario

• X establishes trust. Y is an income beneficiary with
  power to determine in her will to whom assets shall
  pass. Y exercises this power.
• Trust owns US assets at time Y dies.
• Inclusion in Y’s estate for US estate tax purposes:
   – If Y is US citizen or resident: all assets of trust
   – If Y is not US citizen: US assets of trust
• Double tax:
   – Because Y is not subject to Canadian death tax on these
     assets, no foreign tax credit for US estate tax.

         Children in US

• Important to ensure basis step-up on death
   – Otherwise, double taxation will arise
   – For spousal or joint partner trust, basis step-up not
     automatic but can be accomplished with planning
     (via power of appointment)

• Special issues re: investment holding company
   – Repeal of US Foreign Personal Holding Company rules
     removes some obstacles
   – Many complexities remain
   – Consider NSULC

         Inheritance from US Revocable
• US residents typically hold investments in a
  revocable trust
   – Purpose: to avoid probate
   – Trust also serves as estate planning vehicle
     (will substitute)

• For US tax purposes: On death, assets are
  included in gross estate (because of power of
   – Therefore, receive basis step-up

         Inheritance from US (cont’d)

• If beneficiary is Canadian resident:
   – No basis step-up under ITA
   – Double tax if receive trust assets and sell

• Consider:
   – Trust sells assets shortly after death
   – Trust distributes cash in following year (as capital)

• Beneficiary taxable on trust’s income as became
  payable to the beneficiary in year (ITA 104(13)(a))
   – Did beneficiary have right to enforce payment in year trust
     sells assets (ITA 104(24))?

        Alter Ego & Joint Partner Trusts

• If trust is revocable, US assets will be included in
  estate of decedent
   – power of appointment

• No foreign tax credit on T3 return for US estate tax
• Moral: don’t hold US-situs assets in these trusts!

         US Gift Tax

Citizens and Domiciliaries
• Imposed on all transfers of property made during lifetime
   – Based on fair market value of assets transferred
   – Exemption of $12,000 per year per donee (indexed to inflation and
     rounded down to the nearest $1,000)
   – Lifetime gift tax exemption is $1,000,000 (not indexed)
   – To the extent that the lifetime gift tax exemption is used, there will
     be a corresponding reduction in the unified credit
• Marital exemption
   – Unlimited gifts to a US citizen spouse
   – Exemption of $125,000 per year to non-US citizen spouse (indexed
     to inflation)

         Is Your Client a US Citizen?

• US citizenship must be formally renounced to be
   – Renunciation requires filing prior year tax returns

• Freeze / Corporate Reorganizations

  Greg Simpson, CA, CPA, TEP
         Partner - Tax
  Steven Peters, CA, CPA, TEP
   Director, International Tax

            KPMG LLP
1959 Upper Water Street, Suite 1500
       Halifax, NS B3J 3N2


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