Are you a Canadian who owns property in America, or an American living in Canada. Start planning now to protect your heirs from hefty U.S. estate taxes. You should consider an irrevocable life insurance trust for this purpose. It is the most common type of cross-border trust, and very easy to set up. Here are the advantages to both Canadians and Americans in Canada of having such a trust set up when doing their estate planning.
Advantages for Canadians Who Own Property In the United States
Many Canadians own property in the United States. It's common among people who live near the border, and is usually a good investment. However, this leaves them open to U.S. estate tax laws that can decimate the value of their estates.
The U.S. will tax any property owned by Canadians within its borders that is worth $60,000 or more, and the estate tax rate can be as high as 35 percent. By putting the majority of their financial assets into an irrevocable life insurance trust, these taxes can be avoided
With an irrevocable life insurance trust, you set up a life insurance policy with an insurance professional who knows how these things are arranged. The trust protects your life insurance benefit from being subject to U.S. estate taxes if you have financial or property holdings there.
In the typical life insurance scenario, the insurance pays out its benefit to your heirs when you leave the world. If you have property or other financial assets in the United States, the money from the policy becomes taxable under U.S. estate laws.
This can be a real financial burden on your heirs, who may need the money for other expenses. The irrevocable life insurance trust pays out life insurance benefits like any other, but the money from it is not considered to be a part of your estate that is subject to taxation.
Advantages for U.S. Citizens Who Live in Canada
The irrevocable life insurance trust also protects people who are U.S. citizens, but who live in Canada. This is often the case with U.S. citizens who marry Canadian citizens, who move there for jobs and then stay after retirement, or who go to school there and then stay to get jobs. Some people even move to Canada for the many social benefits the country has to offer.
Whatever reason a U.S. citizen has for living in Canada, their estate is still subject to U.S. taxes as long as they don't give up their citizenship. It doesn't matter how long they have been living in Canada.
Any property or money a U.S. citizen has in Canada is considered part of their worldwide holdings under U.S. tax law, and is subject to a 35 percent tax rate when they die. According to Advisor.ca, the tax rate goes to 45 percent if their assets are $3.5 million or more.
This can be worked around sometimes by transferring ownership of all assets, including life insurance, to a Canadian spouse or someone else who is a Canadian citizen. However, this can still be tricky, as U.S. tax laws require a citizen to live for three years beyond ownership transfer to avoid the tax. Establishing an irrevocable life insurance trust with a Canadian insurance agent or wealth manager is the only sure way of avoiding the taxes.
The U.S. and Canada share many familial and economic ties. That is why their tax laws often end up getting intermingled with each other. If you are Canadian and own U.S. property, or a U.S. citizen living in Canada, you need to talk to an insurance professional about setting up an irrevocable life insurance trust to protect your assets for your heirs. It's part of smart cross-border estate planning.