Estate, Gift, and Trust Tax Services for Individuals and Business Owners
Careful estate and gift tax planning can help transfer your wealth to the next generation in a tax-efficient fashion. We’re here to help you plan all aspects of this highly sensitive process with all your objectives and priorities in mind. Our team of experienced tax advisors will be happy to assist you with various matters relating to global estate, gift and trust tax planning and compliance, including the following (note that the discussion below is very general, considers some examples of potential assistance we may provide, and does not work in all cases, especially, involving cross-border matters; as such, it is very important to discuss the estate and gift tax issues before any planning to ensure proper tax treatment and achievement of set objectives):
The U.S. federal estate tax is a tax on your right to transfer property at your death and it can get as high as 40 percent. On top of that, 19 U.S. states and the District of Columbia have either an estate tax, an inheritance tax, or both, like New Jersey! We can help you determine your U.S. estate tax exposure, make a determination on your and your beneficiaries’ residency for U.S. federal estate and gift tax purposes, help you understand applicable reporting and tax filing requirements, including relevant elections and exemptions, as well as help in developing an estate plan that would be tax-efficient from a cross-border perspective.
While Canada does not have a dedicated death or inheritance tax, a Canadian taxpayer’s estate is generally treated as a sale (also known as a deemed disposition), which means that assets that have appreciated in value, or those with a low tax basis, can trigger capital gain taxes on the individual’s deceased tax return.
Transfer to a spouse are generally estate tax-free in the United States when it concerns U.S. citizen spouses, but the estate tax exposure may arise again at the time of the surviving spouse’s death, thus a pure marital transfer is more of a deferral solution as it does not entirely eliminate estate taxes. Setting up a bypass trust or a marital trust is often an initial step in estate tax planning as it may help maximize the estate tax exemption by letting a surviving spouse ultimately utilize the maximum exemptions of both spouses. We can help in identifying the most optimal tax strategy.
Various forms of trusts are popular instruments when it comes to estate tax planning, mainly because the property gets moved into a trust during the individual’s lifetime, which helps reduce the value of the estate, and often brings it below the exemption amount (U.S. $5.450,000 for the 2016 tax year). Here are some popular types of revocable and irrevocable trusts that we can help consider and set up:
- Qualified Personal Residence Trust (QPRT) – This trust lets you pull out your home from the value of the estate and continue to live there for a set period of time. There are some limitations and specifics to consider, but, generally, since a person’s primary residence tends to be a substantial asset, this is a useful tool that can significantly reduce the value of the estate and minimize the tax bill.
- Grantor Retained Annuity Trust (GRAT) / Grantor Retained Unitrust (GRUT) – These vehicles are somewhat similar to the QPRT discussed above, but allow income-producing assets, such as stocks, bonds, investment real estate or businesses, to be transferred into the trust.
- Irrevocable Life Insurance Trust (ILIT) – This trust can remove the value of your life insurance from the estate. It also provides for tools to control spending of the insurance proceeds by beneficiaries.
- Limited Liability Company (LLC) and Family Limited Partnership (FLP) – These solutions may allow for transferring of various types of assets (including businesses, stocks, real estate) to your kids now, while retaining some control over the assets, for example, mandating a requirement for your approval of a sale, or another transaction with the asset.
- Qualified Terminable Interest Property Trust (QTIP) – modern family situations can get pretty complex and a QTIP might help. It’s probably the most flexible form of a marital trust, which can be of interest to people with children from a prior marriage, or when a concern exists about what could happen if a surviving spouse remarries
- Charitable Trusts – such as the Charitable Remainder Trust (CRT) and the Charitable Lead Trust (CLT), can be a useful instrument for tax planning driven by your philanthropic activity.
Did you know that federal law allows you to give up to US $14,000 (double, if you are married) to as many people as you wish each year. This instrument alone can be a great way to manage one’s estate tax planning by minimizing the estate value with annual reductions for cash or property gifts to your children and grandchildren.
Getting life insurance or an annuity contract could be a good add-on feature to your big picture inheritance tax plan, as they can provide liquidity and become a wealth-replacement vehicle, both of which can be critical if estate is light on cash and its equivalents.
We will help properly report all the estate and gift activity to the IRS, by filing all the necessary forms and statements. These filings may include the following:
- Forms 3520 and 3520A
- Form 709 - Gift (and Generation-Skipping Transfer) Tax Return
- Form 706 - Estate (and Generation-Skipping Transfer) Tax Return (including nonresident alien return)
- Form 1041 - Income Tax Return for Estates and Trusts (including nonresident alien return)
People are becoming very mobile and close family members are often tax residents of different countries, which adds some complexities, but also some unique opportunities, to the mix. Below are examples of some specific areas we can help with:
- Treaty positions – When more than one country expects a share of the tax at death, the tax bills can add up. Fortunately, treaty relief is available. In some cases, it’s based on the estate and gift tax provisions in the applicable US income tax treaty (for example, the Canada-US income tax treaty extends to estate tax matters) and, in other cases, there are dedicated estate tax treaties. We will help you get the most benefit out of applicable tax treaties!
- Inheritances or gifts from non-US persons – Generally, no estate or gift taxes arise on a transfer from a non-US resident person to a US resident, with exception for transfers of property located in the US (US situs assets). This could be a great planning tool for people who immigrated to the United States, but whose parents are still abroad. Note, though, that additional complexities may arise depending on your situation, and you should be prepared to do some tax reporting.
Canadians often use trusts in business succession planning or to maximize one’s lifetime capital gain exclusion. Understanding what US tax implications may apply to an estate freeze, including ensuring its tax-free treatment under applicable US tax-free reorganization provisions, and knowing all aspects of US tax exposure that US grantor, trustees or beneficiaries may present, may mean a difference between high taxes and lower or no US estate and gift tax liability. In addition, being aware of “throwback rules” and ensuring tax compliance and reporting can help the client avoid hefty and substantial penalties.
We specialize in tax matters, and do not directly draft wills for our clients. At the same time, we often review wills and trust instruments of our clients to ensure that they can achieve their goals on both sides of the border, as well as address any applicable compliance and reporting requirements. We are ready, however, to team up with an estate attorney of your choice or recommend one whom we work with, to ensure that the will appropriately incorporates all aspects of the recommended estate plan and to address any potential probate issues or concerns.
To learn more how we can help you in your estate or business succession planning, please call us or send us a note. We will be happy to help. Please also read our article on cross-border estate planning that reviews some practical considerations relevant to estate and gift tax planning in the cross-border context.