The two presidential candidates in the U.S., Hillary Clinton and Donald Trump, have completely different agendas regarding estate taxes. Trump pledges to repeal the existing estate tax regime, making it more favourable for wealthy taxpayers, whereas Clinton would make taxation more onerous on them by increasing estate taxes.
“Trump’s proposed changes would eliminate exposure to estate taxes for high net-worth [Americans], while Clinton’s proposed changes would increase the number of [Americans] affected by estate taxes and increase the potential exposure to estate tax liabilities for those who already expect to pay estate taxes under the current rules,” says Jason Ubeika, partner, U.S. tax, with BDO Canada LLP in Mississauga, Ont.
Currently, U.S. “persons” – American citizens and other people domiciled in the U.S. – pay estate taxes on the value of estates in excess of US$5.45 million, with a top tax rate of 40%. Non-U.S. residents, including Canadians who own property in the U.S., are taxed on the fair market value of their property. However, Canadians benefit from the provisions of the Canada/U.S. Tax Treaty and are treated in the same way as American citizens regarding estate taxes, says Veronika Chang, a lawyer with Morris Kepes Winters LLP in Toronto who specializes in U.S. tax law.
Under the U.S. estate tax regime, most U.S. residents don’t have to worry about estate taxes, which affect only about 2% of the population, says Chang. But before jumping to any conclusions about potential estate tax changes, note that there’s no guarantee that either presidential candidate’s changes will come to fruition, cautions Ubeika. For now, they’re simply proposals that will have to get legislative approval.
Therefore, rather than thinking about how changes to the U.S. estate tax regime will affect your clients and seeking to make any adjustments to their estate plans, Wayne Bewick, partner with Toronto-based accounting firm Trowbridge Professional Corp. who specializes in expatriate taxation, suggests that you pay attention to any changes and take action only if necessary.
Over the past 15 years, estate taxation has shifted “from one year when there was no estate tax to a $1-million limit to a $5.45 million per person limit” – with “limit” referring to the value of estates in excess of these amounts, he says. And the rules could change again.
Ubeika provides the following summaries of Clinton’s and Trump’s proposals.
– Restore the estate tax rules that were in effect in 2009. This would make estates of up to US$3.5 million exempt from estate taxes (the exemption for 2016 is US$5.45 million) and increase the estate tax rate applicable to most taxpayers to 45% (the top rate for 2016 is 40%).
– Raise the estate tax rate for ultra-high net-worth individuals to 65% for estates worth more than $1 billion.
– Restrict the ability to use trusts to shift assets to family members to avoid or limit estate taxes.
– Remove the ability of heirs to “bump up” the cost basis of inherited assets to their fair market value on the date of death by making the bequest of assets to heirs a taxable event for income tax purposes. This revision of the rules would result in capital gains for the decedent in the year of death if the assets have appreciated in value from the time they were purchased to the time of death.
Trump, on the other hand, would:
– Repeal estate taxes altogether.
– Replace estate taxes by taxing capital gains at the time of death. The first US$10 million of capital gains would be exempt from taxation to provide relief to small-business owners and farmers.
Clinton’s proposed changes would increase the number of U.S. persons affected by estate taxes, Ubeika explains. Those who “currently have net worth between US$3.5 million and US$5.4 million, or [who] reasonably expect to have an estate in that range by the time they die, will suddenly potentially be subject to estate taxes upon their death.”
Consequently, these U.S. persons may find that the amount of their potential tax exposure has increased significantly enough that engaging in more significant planning to avoid or mitigate their tax exposure becomes worthwhile.
Meanwhile, Trump’s proposed changes to repeal the estate tax rules permanently would eliminate the need for high net-worth U.S. persons to go to great lengths – as they usually do – to reduce or avoid their estate tax burden.
“In hindsight, [Trump’s proposals] also may render previous estate tax planning largely unnecessary,” says Ubeika.
Therefore, U.S. persons living in Canada would be able to engage in estate planning primarily based on Canada’s tax and family laws, without much regard to U.S. tax consequences, he adds.
Both presidential candidates propose subjecting unrealized capital gains to income taxes at the time of death. Thus, U.S. persons living in Canada would face rules that are similar to those that exist in Canada. Therefore, these taxpayers would end up paying the higher of the Canadian or U.S. taxes on these gains.
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