Domestic and foreign assets of all U.S. citizens and decedents are subject to U.S. estate tax law when they are above the allowed limit. The estate tax exclusion limit sits at $5,250,000, leaving a large number of estates below it and not subject to federal estate taxes. In addition, federal estate tax does not apply to assets left to a surviving spouse who is a U.S. citizen due to `unlimited marital deduction’ (even if the deceased spouse is a non-resident). However, non-U.S. (residents alien and non-resident alien) spouses need to pay estate taxes on their U.S. situs property above the allowed limit of $60,000 (equal to a $13,000 unified credit); quite similar to the U.S. federal gift tax law (Read: U.S.-Canadian spouses need to be careful of the Federal gift tax rules). Although a treaty between the two countries may be useful in minimizing the impact of the taxes, it is recommended taxpayers consult an estate tax professional in order to develop a proper estate plan.
AG Tax estate tax accountants have prepared a brief overview of the applicable law to a decedent’s estate in the U.S. and qualified domestic trusts which could be used to transfer a decedent’s property to their non-resident spouse.
Portability of Exclusion Limit
The U.S. Congress allows married couples a total exclusion of $10,500,000 ($5,250,000 each). In the event of the death of one of the spouses, the surviving spouse can use the unused portion of the deceased’s exclusion limit or “DSUE” (Deceased Spouse’s Unused Exemption).
Example: A and B are married, and A has passed away and left an estate of $2,000,000. It is not subject to estate tax since it is within the allowed limit of $5,250,000. Additionally, $3,250,000 of the unused exclusion gets carried forward to B’s exclusion amount of $5,250,000 providing B with a total exclusion of $8,500,000 from estate taxes upon his/her death.
The downside of portability is that it is only available to U.S. citizens; therefore, a non-resident surviving spouse cannot claim the DSUE. However, if the decedent is a non-resident and the surviving spouse is a U.S citizen then he/she can claim the DSUE.
In order to obtain the DSUE, married couples should consider the following options:
– Obtain U.S. citizenship to qualify for the unlimited marital deduction. Although this could be time-consuming, the IRS provides an additional 6 months period to file the final return of the deceased.
– Consult an estate lawyer regarding a ‘Qualified Domestic Trust’ (QDOT) which allows individuals to leave their estate to a U.S. trust with their non-resident spouse as the beneficiary of that trust, rather than transferring the assets directly to the spouse.
How does a QDOT Function
Certain IRS rules govern the formation of a QDOT. For instance, the trust should be created when both the spouses are alive and the assets should be transferred before the estate tax return of the decedent is filed (nine months after the death). Additionally, the trustee(s) for the trust should be a U.S. Citizen or U.S. Corporation.
On the death of a spouse, his/her estate is transferred to the QDOT, and the beneficiary of this trust is the surviving non-resident spouse. The surviving spouse continues to receive income such as interests from this trust which is not subject to estate taxes, but could be subject to yearly income taxes.
If any money is withdrawn from the trust it could be subject to estate tax, unless the spouse qualifies for a ‘hardship exemption’ in which they are facing a difficult situation (“immediate and substantial” need) such as health, maintenance, education, support or if they legally owe money to an individual, bank or organization, and the spouse has no immediate access to funds.
The assets held in the trust further pass on to the beneficiaries (often children) nominated by the other spouse upon their death, and are not included in the estate of the second-to-die spouse, which could be subject to estate taxes if it holds significant value, but it would be treated as if it were the estate of the first-to-die spouse.
There are various other trusts available, and their suitability may vary based on each individual’s situation. Taking this into account, it is nothing less than a wise decision to consult an estate tax lawyer/professional who could advise the right type of trust for an individual, and help get a proper estate plan in place.
AG Tax LLP Can Help
If you have any tax-related queries or need assistance with tax planning or filing please contact AG Tax. Our tax professionals are highly-experienced with U.S. and Canadian tax laws and can provide you the right guidance to handle your tax situation.
Aylett Grant Tax LLP is a full service accounting firm with a dedicated team of experts, who are highly-qualified and experienced in handling situations related to U.S., Canadian, and other international tax laws.
We can assist with:
- Canadian Personal and Corporate tax returns
- Cross Border Taxation and Business Planning
- U.S. Personal and Corporate Taxation
- Disclosure of Foreign Assets and other information filings
- Retirement planning
- Estate Planning, Inheritance tax advice
To obtain a quote or to arrange for a consultation to discuss your tax related queries, please contact us at:
- 416-238-5920 (Greater Toronto Area, ON)
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