the most common cross-border tax & financial planning mistakes. · 2008. 5. 14. · u.s. estate...

Terry F. Ritchie, CFP, RFP, EA, TEPCertified Financial Planner (US)

Registered Financial Planner (Canada)Enrolled to Practice before the U.S. Internal Revenue Service

Trust & Estate Practitioner (STEP)

Transition Financial Advisors Group Calgary, AB & Phoenix, AZ

The Most Common Cross-Border Tax &

Financial Planning Mistakes. What Advisors Need to KnowThe Canadian Institute of Financial Planners

6th Annual National Conference

Learning Objectives

• U.S. Income, Estate & Gift Tax Basics• New Developments in U.S. Estate Tax• Cross-Border Estate Planning• The Implications of Giving up U.S. Citizenship• Other Common Planning Issues you need to

be aware of• Questions

Transition Financial Advisors Group

Values, Beliefs, Goals, Objectives

Client, Spouse, Children, Grandchildren, Relatives

Financial Advisor

Comprehensive Overview

Cash Mgmt

IncomeTax

Independence& Education

PlanningRisk

Mgmt

Estate &CharitablePlanning

InvestmentPlanning

- Currency Exchange- Mortgage broker- Banker- Realtor- Auto Dealer

- CPA/CA- Tax Attorney- Bookkeeper- IRS/State- Canada Revenue Agency- Province

- Actuary- Administrator- Social Security- Custodian- Social Development Canada

- Insurance Agents:Prop./CasualtyLifeDisabilityHealthLong-term Care

- Provincial healthcare- Medicare

- Estate PlanningAttorney

- Trust Administrator- Estate/Gift tax

Accountant- Charities- Custodian- Trustee

- Mutual fund manager/Co.

- Brokerage firm- Investment Manager

CustomsPlanning

ImmigrationPlanning- Immigration attorney- US Citizenship & Immigration Services- Citizenship & Immigration Canada

- US Customs- Canada Customs & Revenue Agency- Moving Co.

Living Desired Lifestyle

Where was your Client Born?

• If born in the US, irrespective of where they physically live or die:– Considered resident of US for income, gift &

estate tax purposes– Taxed on worldwide income– Taxed on FMV of worldwide estate at death– Subject to US gift tax on the transfer of property

by gift, direct or indirect, in trust or otherwise.

Income Tax - US Citizens• Subject to tax on worldwide income• Required to annually file IRS Form 1040• Foreign earned income exclusion

– U$85,700• Foreign tax credits• Specific tax treaty elections• Alternative minimum tax• Additional onerous tax filing requirements

Estate Tax - US Citizens• Subject to tax on FMV of worldwide estate at

death• Presently entitled to an exemption of U$2

million– 2008 - $2,000,000– 2009 - $3,500,000– 2010 - Estate tax repeal? I’ll come back to this…– 2011 - $1,000,000

Estate Tax - US Citizens

• Presently subject to highest rate of 45% for estates greater than U$1,500,000– 2008 - 2009 - 45%– 2010 - Top individual rate– 2011 - 55%

Gift Tax - US Citizens• Annual exclusion of U$12,000• Lifetime exclusion amount of U$1,000,000• Gifts to US non-citizen spouse subject to an

annual exclusion of U$128,000• Filing of US gift tax return - IRS Form 706• Either:

– Pay the US gift tax - preserve exemption amount– Reduce exemption amount available at death

because of taxable gift

The Future U.S. Estate Tax

Year of Death U.S. Estate Exclusion

U.S. Estate Tax

2008 $2,000,000 $900,0002009 $3,500,000 $225,0002010 Repealed? $0

2011 & Beyond $1,000,000 $1,495,000

U.S. Taxable Estate of $4 Million

How do you plan for this?

U.S. Estate Tax Uncertainty

• There are now 7 Bills before the U.S. House and 4 before the U.S. Senate to repeal the Estate Tax

• Further, there are 7 Bills before the House and 1 before the Senate to modify the Estate Tax

• Proposed Exemption Changes (currently $2M):– $3M (HR 4235, 4242)– $3.5M (HR 4042, 4172, 4242)– $5M (HR 3475) – from $3.75M to 5M by 2016

• Proposed Tax Rates (currently 45%):– Reduce rates by 20% (HR 4235)– Back to 47% rate (HR 4242)– Keep at 45% (HR 4042)

U.S. Estate Tax Uncertainty

• Why we likely will not see an Estate Tax Repeal– Loss of revenue

• Iraq, global terrorism, economy sucks, etc.– Decline of lifetime charitable donations– Loss of capital gains tax revenue

• The elderly would likely keep assets until death, than sell them prior to death

Cross-Border Will Planning Issues

• US citizen couple resident in Canada– Leaving all assets outright to the surviving spouse

causes the first spouse’s Unified Credit to be “lost”– Tax Planned Will should focus on:

• Utilizing the decedent’s Unified Credit• Unified credit represents the tax on the exemption

amount ($780,800 tax = $2,000,000 exemption)• Often through the use of a Credit Shelter Trust

– Can be achieved in a Canadian Will

US Citizen Couple in Canada

A/B Trust Planning(aka Credit Shelter Trust, Bypass Trust, Marital Trust, Family Trust)

DEATH OF THE

FIRST SPOUSE

A TRUST(Surviving

Spouse’s Trust)

B TRUST(Deceased

Spouse’s Trust)

DEATH OF THESECOND SPOUSE

HEIRS(Beneficiaries)


• Canadian married to a US citizen– Often may wish to leave all assets to the surviving

spouse– This causes those assets to be subject to US

estate tax upon the subsequent death of the surviving spouse

– Therefore, Canadian decedent’s assets could ultimately be taxed as part of the US surviving spouse’s US estate


• Canadian married to a US citizen– Tax Planned Will should focus on:

• Keeping the Canadian’s assets out of the US citizen surviving spouse’s estate

• Often through the use of a Spousal Trust– The terms of the Spousal Trust must be “limited” in

order to keep the trust from being included in surviving spouse’s US gross estate

– May provide for annual income to surviving spouse– Principal distributions at trustee’s discretion -

surviving spouse cannot be given unfettered access


• US citizen married to a Canadian citizen– No US Unlimited Marital Deduction is

available if a US decedent’s assets pass to a Non-US citizen

– Possible immediate US estate exposure


• US citizen married to a Canadian citizen– Tax Planned Will should focus on:

• Funding of Bypass Trust up to the exemption amount available in the year of death

• Excess should pass to a Qualified Domestic Trust (QDOT)

• Election can be made through will or on decedent’s estate tax return

• QDOTs create administrative hassle, but allow for deferral of US estate tax until:

– Corpus is distributed from the QDOT to the non-US citizen surviving spouse, or

– Until the death of the surviving spouse

Incorrect Use of Beneficiary Designations

• Based on the Will planning issues that we just discussed:– It may be more appropriate to name the

estate as beneficiary– Ensures that the trust planning within the

Will will be achieved• Bypass trust planning

My Client is a Dual Citizen

• Individual is both a citizen of the US and Canada

• Not directly recognized through US Immigration (USCIS)

• Client would be a dual resident for income tax purposes– Required to file both Canadian and US income tax

returns on worldwide income• Considered resident of the US for estate and

gift tax purposes

Client Should Just Give Up US Citizenship

• U.S. tax law changes of Oct. 04 introduced substantial changes to expatriating individuals– U.S. citizens who renounce citizenship

• “Reed Amendment” – although never yet enforced, may bar expatriating U.S. citizens from re-entering the U.S.

– Long-term residents• Green Card holder in at least 8 of last 15 years• Residency under Substantial Presence Test

– Provision applies for a period of 10 years following date of expatriation • Referred to as the “Alternative Tax Regime”


• The Alternative Tax Regime:– Requirement to file IRS Form 1040NR along with IRS Form

8854 annually for 10 years– Failure to file penalty of U$10,000– Includes US source income under special sourcing rules– Cannot be physically present in the U.S. for more than 30

days of the 10 calendar years after expatriation:• Worldwide income tax• Gift tax• Estate tax (don’t die in that year!)


• The Alternative Tax Regime applies to any expatriate who:1. Had an average tax liability in previous 5 years of

$139,000, or2. Has a net worth of U$2M or more, or3. Has not filed U.S. tax returns for the prior 5 years

Number 3 is generally where most U.S. citizens in Canada will get caught!


• Last July 18, the U.S. House introduced legislation which includes a proposed “exit tax” for individuals who expatriate from the U.S.

• Deemed sale of property upon expatriation– Generally applies to all property interests, exclusive of U.S.

real property and special rules in the case of trust interests.– Fairly generous exemptions are proposed on gains not

exceeding U$600,000 ($1.2 M for expatriating married couples)• Canada are you listening!!!!!

Jointly Held Assets• Could compromise estate planning

opportunities under “tax planned” Will• Presumption is that 50% of value forms part

of the first to die’s estate– True for US citizen couple– Not true for non-resident aliens

• Tracing rule would apply• Gift deeding could make sense• Be aware of annual gift tax exclusion guidelines

– Be careful of jointly held assets with children

My Clients Are Applying for US Green Cards

• Canadian departure planning is critical– Timing of departure to coincide with Canadian non-residency

tax status• When are spouse and children leaving Canada?• Determination of Cdn residency is a facts and circumstances

test– Deemed disposition of assets for Canadian tax purposes

• Physically sell assets to step-up cost basis for US purposes• Treaty relief now

– Crystallization of RRSPs– Can client maintain Cdn investment accounts as a non-

resident of Canada?

My Clients Are Applying for US Green Cards

• US Entry Planning– Cost base of certain property is the same as original cost in

Canada unless specific elections are made– Timing of US income tax residency relative to Canadian

departure– Specific first year US income tax elections should be

considered– Family US Individual Taxpayer Identification Numbers

(ITINs) need to be acquired– US residents for gift and estate tax purposes?

• Role of Inter Vivos Trusts in the US

Issues Related to Life Insurance

• Need to be aware of the US rules related to “incidents of ownership” to avoid life insurance proceeds from forming part of the decedent’s worldwide estate:– The right to change beneficiaries or their shares,– The right to surrender their policy for cash or cancel it,– The right to borrow against the policy reserve,– The right to assign the policy or revoke assignment

• Could form part of the non-resident decedent’s worldwide estate

– Could therefore minimize US pro-rated unified credit

• Consider alternative ownership arrangements– Utilize an Irrevocable Life Insurance Trust (ILIT)– Subject to “3 year rule”

My US Citizen Client Does Not File US Taxes

• US tax rules are clear with respect to US income tax residency for citizens

• In majority of cases, nothing more than an administrative burden– Foreign earned income exclusion (U$85,700)– Foreign tax credits

• Loss of specific Tax Treaty elections• Penalties for non-compliance• Family member requires or desires US immigration sponsorship• Become beneficiary of US assets• Desire to retire or spend greater time in the US• Automated Entry/Exit System?• IRS/USCIS start sleeping together?

My Client Wants to Buy US Real Estate

• Vacation vs. Commercial Property• Income type objective:

– Rental and/or capital gain• Canadian tax issues• New purchase vs. existing real estate


• US income tax on rental income• US branch tax on unreinvested income• US capital gains tax on sale• US estate tax on death


• Generally, a trade-off based on results• Non-US investors in US real estate

typically have to decide to:1. Pay higher US corporate taxes (to

insulate from US estate tax), OR2. Accept some level of US estate tax risk

for current US income tax savings• 39% (Corp) vs. 15% (US LTCG Rate)

Additional Issues• US tax compliance related to RRSPs held by US citizens• Sale of US real property by non-resident

– US withholding tax issues – Income tax filing and reporting (Canada & US)

• Bringing US retirement plan assets to Canada• US citizen/Cdn resident with a CANCO

– Estate freeze in Canada– US anti-deferral rules

• Cross-Border Social Security Benefits• Stock Options

Our Suite of Resources

Call (480) 722-9414 or check out www.transitionfinancial.com

Thank YouTerry F. Ritchie,

403-257-4488

480-722-9414

[email protected]

Calgary Office Arizona Office

116 Mt. Apex Green SE 20 W. Juniper Ave., #101

Calgary AB T2Z 2V5 Gilbert AZ 85233

the most common cross-border tax & financial planning mistakes. · 2008. 5. 14. · u.s. estate...

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