Tag: estate tax

In Estate Planning, Where There's a Will There's a Way

Odin-Feldman-Pittleman-logo

An August 15, 2014 article, by Robert Wood, in Forbes.com, told how many large companies, such as GM and Merck, pay zero taxes. It told how Apple avoided $9 billion in US taxes in 2012, according to a US Senate Report issued in 2013.

In the estate world, billionaires such as George Steinbrenner, the Yankees owner who died in 2010, avoided an estimated $500 million in US estate tax. But that was because he died in 2010, the one year when there was no estate tax. In 2014, US citizens can protect $5 million from estate tax, and that amount is indexed for inflation, so the current figure is $5,340,000. Thus, $10,680,000 protects most American married couples from paying federal estate tax upon the second of their deaths. Married couples fortunate enough to have more than $10,680,000, will pay federal tax at 40%.

Even wealthy families with assets exceeding $10,680,000 (or a single person exceeding $5,340,000) can take advantage of gifting strategies and charitable planning to avoid or reduce estate tax. These strategies include techniques known as “GRATS,” “IDGT’s,” “CRT’s” and “CLT’s,” which mean nothing except to the tax professionals who implement them, and the wealthy who benefit from them. Although Congress has threatened to curtail or eliminate many of these strategies, they currently remain legal options for US citizens upon their deaths to leave more to their families and less to the IRS.

Whether it is multi-national public companies with billions of income, or wealthy US families with millions of assets, when it comes to avoiding taxes, be it income or estate, where there’s a will there’s a way.

ARTICLE BY

John P. Dedon
OF
Odin, Feldman & Pittleman, P.C.

The Complicated Landscape of US Estate Tax

Altro Levy Logo

Canadians who own assets in the U.S. may be subject to U.S. estate tax.

This tax is based on the fair market value of all U.S. assets owned at the time of death. It can reach 40%, depending on the value of U.S. assets and the world-wide estate.

But not all Canadians who own U.S. assets will be subject to U.S. estate tax. A close look at the new U.S. estate tax rules will help you determine whether your Canadian clients are exposed to U.S. estate tax.

New U.S. estate tax rules

On January 2, 2013, President Obama signed the American Taxpayer Relief Act of 2013 (the Act) into law. The Act resolves many of the issues raised by the fiscal cliff.

Pursuant to the Act, U.S. estate tax liability of non-U.S. residents depends on the answers to the following two questions:

  1. Is the value of the U.S. estate more than $60,000?
  2. Is the value of the worldwide estate greater than $5,250,000?

If the fair market value (FMV) of U.S. assets is less than $60,000 on the date of death, then there is no U.S. estate tax. If the value of U.S. assets on death exceeds $60,000, a Canadian’s estate may still be exempt from U.S. estate tax if the value of his or her worldwide estate upon death is less than what is known as the “exemption.”

Worldwide exemption for 2013 and beyond

The Act provides an exemption from U.S. estate tax if a non-resident dies with a worldwide estate with a FMV of less than $5,250,000. This exemption amount is inflation-adjusted. Everything counts when calculating a Canadian client’s worldwide estate—including RRSPs and life insurance.

Additionally, when advising a married couple about U.S. estate tax exposure, it’s important to calculate the value of both spouses’ estates combined.

Clients often ask whether the U.S. estate tax is on the worldwide estate. The answer is no; the IRS does not tax a Canadian resident (who is not a U.S. citizen) on his or her worldwide estate.

The only assets that are subject to U.S. estate tax for Canadians are U.S. assets.

What are U.S. assets?

Common U.S. assets include real estate in the U.S. and personally held stocks of U.S. corporations, both public and private.

Here’s a complete list of U.S. assets subject to U.S. tax:

  • real estate property located in the U.S;
  • certain tangible personal property located in the U.S., such as furniture, vehicles, boats and airplanes;
  • golf club equity memberships;
  • shares of U.S. corporations, regardless of the location of the share certificates (even inside RRSPs or RRIFs);
  • interests in partnerships owning U.S. real estate or carrying on business in the U.S.;
  • U.S. pension plans and annuity amounts (IRAs and 401K plans);
  • stock options of a U.S. company;
  • U.S. mutual funds;
  • money owed to Canadians by American persons; and
  • money market accounts with U.S. brokerage firms.

The following is a list of U.S. assets not subject to U.S. estate tax:

  • U.S. bank deposits;
  • certain debt obligations, such as U.S. government bonds;
  • American depository receipts;
  • term deposits/guaranteed investment certificates;
  • real estate situated outside the U.S.;
  • Canadian mutual funds denominated in U.S. dollars that invest in U.S. stocks;
  • life insurance proceeds payable on the death of a Canadian citizen and resident who is not an American citizen; and
  • non-U.S. stocks, bonds and mutual funds.

Many Canadians own assets subject to U.S. estate tax with vacation homes and shares of U.S. corporations topping the list. How can you help clients who own these assets?

The following scenario provides some answers.

Strategies for Canadians who own U.S. assets

Richard is a Canadian citizen and resident, single, with a worldwide estate of $10 million. He owns an $800,000 property in Ft. Lauderdale, Fla.

Richard’s inherited 25% of the shares of four Florida corporations from his deceased father, which he estimates have a value of $200,000. Each corporation owns an apartment building in South Florida.

The chart “Example estimates” (this page) approximates Richard’s 2013 exposure to U.S. estate tax.

Tax planning for U.S. real estate

The goal of any tax-planning for a Canadian owner of U.S. real estate is to ensure the estate of the Canadian decedent is not subject to U.S. estate tax. Consequently, title should not be in his or her name. Alternative ownership structures include:

  • corporation;
  • cross-border trust (irrevocable or revocable); and
  • limited partnership.

These ownership structures avoid probate and guardianship proceedings in the case of incapacity and can defer or avoid U.S. estate tax.

Tax planning for stocks

Although Richard’s shares of U.S. stock are considered U.S. assets, there are tax-planning techniques for avoiding U.S. estate tax.

01 Sell

This may trigger capital gains tax in Canada, though Richard may have some capital losses to apply against it.

02 Create a Canadian holding corporation

Transfer the shares of U.S. stocks on a tax-free basis into a Canadian corporation, of which Richard is the shareholder.

Should Richard pass away with U.S. stock in his Canadian holding company, there will be no U.S. estate tax because Richard no longer owns shares of a U.S. company; he only owns shares of a Canadian holding corporation that owns shares of the Florida companies that Richard’s father passed on to him.

The U.S. Foreign Investment in Real Property Tax Act (FIRPTA) may apply to Richard’s transfer of U.S. stocks into a Canadian company. FIRPTA requires that 10% of the sale price or transfer value of U.S. real estate by a non-resident of the U.S. be withheld and remitted to the IRS. Richard can avoid this with proper structuring and reporting, which we’ll explain next time. No withholding will be required and no disposition will have occurred.

Example estimates of U.S. Estate Tax Payable for 2013

Article by:

David A. Altro

Of:

Altro Levy LLP

2013 Year-End Planning for Lesbian, Gay, Bisexual and Transgender (LGBT) Taxpayers

marcum logo

2013 has been a year of historic change for the LGBT community. The landmark Supreme Court decision in U. S. v. Windsor, decided on June 26, 2013, held that Section 3 of the Defense of Marriage Act (DOMA) (defining marriage for federal purposes as being between a man and a woman) violates the equal protection clause of the Constitution and is therefore unconstitutional.

For married same-sex couples living in one of the 14 states (as of this writing) or District of Columbia which recognize same-sex marriages, their marriages are now recognized for both federal and state purposes. Married same-sex couples living in a state that does not recognize same-sex marriages are left with many questions.

Place of Celebration

On August 29, 2013 the IRS released Revenue Ruling 2013-17 clarifying that where a couple was married (place of celebration) rather than where a couple resides (place of domicile) determines a same-sex couple’s marital status for federal tax purposes. A tremendous benefit of this decision is that married same-sex couples can now travel freely across state lines and be considered married in each state for federal tax purposes. This ruling applies to same-sex marriages legally entered into in a US state, the District of Columbia, a US territory or foreign country. The ruling does not apply to civil unions, registered domestic partnerships or similar relationships that might be recognized under state law but do not necessarily guarantee the same protection as marriage.

Impact on Gift and Estate Taxes

Before the Windsor decision, transfers between same-sex married couples could result in significant gift and estate taxes. Now transfers between same-sex spouses can generally be made with no tax consequences. In addition, certain estate provisions such as portability, the marital deduction and qualified terminable interest property (QTIP) trusts are now available to same-sex married couples. Other commonly used estate and gift planning tools for married couples, such as gift splitting and spousal rollover IRA’s, are also now available to a same sex married couple.

If you die in a state that does not recognize same-sex marriage, your spouse will not automatically inherit under state spousal rights statutes. Therefore, if the couple intends to inherit from each other, a will or living trust is still needed.

Planning tip: An important part of 2013 year-end planning is to review and update wills and estate documents to make sure to take advantage of the new rules and to properly designate beneficiaries.

Impact on Income Taxes

Many married couples have a lower joint tax liability because of netting income and deductions, eligibility for certain tax credits and income exclusions, or have an increased tax liability due to the marriage penalty tax or because of limitations on deductions based on their combined adjusted gross income. For 2013, LGBT couples considered married under the state of celebration rule will have to file their federal tax return as married filing joint or married filing separate, which may cause a shift in tax planning.

Planning tips: As part of 2013 year-end planning, same-sex couples should work with their tax advisors to determine if original or amended returns, using married filing joint or married filing separate status, should be filed for years open under the statute of limitations. The statute for a refund claim is open for three years from the date the return was filed or two years from the date the tax was paid, whichever is later. Projections should be run to compare the potential benefit or cost of a married-joint filing versus separate-single or head of household filing, as there may be a better tax result to leave the returns as filed and not amend.

In addition, same-sex couples should consider credits that might not have been available as single filers, or consider the traditional year-end planning ideas for married couples mentioned in other sections of this guide.

Impact on Benefits

Before the fall of DOMA, benefits provided to the non-employee same-sex spouse, such as employer provided health insurance, flexible spending plans, etc. were paid with after-tax dollars and the benefit was included in the employee’s taxable income. Now, same-sex couples can pay for these benefits with pre-tax dollars and the coverage will not be included in their taxable income. Employees can file amended returns (for years prior to 2013) excluding those benefits from taxable income and request refunds. Also, employers who paid payroll taxes based on previously taxed health insurance and fringe benefits can also file amended returns (Notice 2013-61 provides guidance to employers for correcting overpayments of employment taxes (FICA) for 2013).

On August 9, 2013, the US Department of Labor (DOL) announced that the Family and Medical Leave Act (FMLA) extends only to same-sex marriage couples who reside in states that recognize same-sex marriage.

On September 18, 2013 the DOL announced (in Technical Release 2013-04) that same-sex couples legally married in a jurisdiction that recognizes their marriage will be treated as married for purposes of the Employee Retirement Income Security Act of 1975 (ERISA) and the Health Insurance Portability and Accountability Act of 1996 (HIPAA). The DOL recognizes the marriage regardless of where the legally married couple currently resides. This announcement covers pensions, 401K’s, and health plans.

The Social Security Administration (SSA) also announced that it will process and pay out spousal retirement claims for same-sex spouses. The SSA urges people who believe they are eligible for benefits to apply as soon as possible in order to establish a protective filing date, which is used to determine the start of potential benefits. Under the SSA’s “Windsor instructions”, claims can be filed when the holder of a social security number was married in a state that permits same-sex marriages and resides in a state that recognizes same-sex marriage at the time of application. Once benefits are approved, the recipient can move to any state without disqualification. Applications that don’t meet these criteria are being held for later processing when further guidance is issued.

Planning tips for employees: Employees in a same-sex marriage should consider amending their tax returns if they were paying for employer-provided benefits to their spouse. Employees in a same sex-marriage should also review the benefits their employer offers to married couples to make sure they are taking full advantage of all benefits. Also, same-sex married couples should provide their Human Resource Department with a copy of their marriage license and confirm that the spouse’s insurance coverage is no longer being included in taxable income and/or that an appropriate adjustment will be made for the 2013 calendar year.

Planning tips for employers: Employers should ensure that their benefits packages are in compliance with the new laws. See Rev. Rul. 2013-61 for guidance on how to correct overpayments of employment taxes for 2013 by either adjusting 4th QTR 2013 Form 941, (correcting the 1st -3rd Quarterly filings) or by filing Form 941-X (correcting all quarters of 2013).

Pre- and Post-Nuptial Agreements

Consider agreements for same-sex couples to avoid disagreements and litigation expenses for future possible divorce. State uncertainty remains.The majority of states currently do not recognize same-sex marriages. There are prominent court cases challenging these state laws, and the resulting impacts on tax and estate planning for same-sex married couples are as yet unknown.

Article by:

Janis Cowhey McDonagh

Of:

Marcum LLP