When Your Children Live in the U.S.: Estate Challenges

Many families face challenges that they could not have foreseen when their children were growing up and living at home that one or more, and in some cases all of them, would end up living in the U.S. Children often decide to live permanently in the U.S. to pursue employment opportunities following post-secondary education in the U.S. Or sometimes, they meet their future spouse while attending a U.S. university, co-habit or marry, have children, and settle in the U.S.

Your child’s decision to become a U.S. permanent resident or citizen, however, can have a significant impact on your estate planning and needs to be carefully considered. Below are a few of the most common issues that can arise:

1. Exposure to U.S. Estate Tax
   A key concern particularly in larger estates is whether the inheritance you leave to your U.S. child might end up being subject to U.S. estate tax at rates of up to 40%.
   Although there is currently a so-called “permanent” exemption of $15 million USD, indexed for inflation commencing January 1, 2027, if significant wealth is being passed down, the exemption may not be enough to shelter a child’s inheritance from U.S. estate tax on their death. As well, what if the exemption amount should be lowered in future?
   With proper planning including under your will, however, special trust provisions for your U.S. beneficiaries, including children and grandchildren, can be used to “bypass” U.S. estate tax. (Read more: our Advisory on Will and Estate Planning Considerations for Canadians with U.S. Connections.)
2. Canadian Discretionary Trusts with U.S. Beneficiaries
   Many Canadians use discretionary family trusts for a variety of estate planning purposes including income splitting among family members and as part of an estate freeze to cap their tax liability on their death.
   Under the terms of a typical discretionary trust, the trustees have discretion to pay income and capital to the beneficiaries, and to accumulate income which is not paid out to the beneficiaries.
   There are U.S. tax rules known as the “throwback rules” which are very punitive if income of a foreign trust as computed under U.S. tax rules is not paid out annually.
   There is also a lot of extra compliance involved and resulting additional professional fees for both the U.S. child who is a beneficiary and for the Canadian trustees in navigating a number of issues, whether it be managing distributions from the trust so the throwback rules are not attracted, foreign exchange computations and related issues, and withholding tax to name a few. For Canadian discretionary trusts with U.S. beneficiaries, it is important to obtain good legal and tax advice.
3. U.S. Child Acting as an Executor, Trustee or Attorney for Property
   There are challenges in appointing a U.S. child as your executor, trustee or attorney for property: some are tax-related, others are related to U.S. securities legislation if a Canadian investment account is involved, and still other legal issues arising in obtaining a court grant of probate of a will if your child resides in the U.S.
   1. Tax Issues
      Canadian tax law looks to where the “mind and management” of a trust is to determine its residency for tax purposes. An important factor, but not necessarily determinative, is where the trustees reside.
      An estate is considered a trust for tax purposes, so where your executors reside is an important consideration as well as where the trustees reside of any trust under your will or that you establish while you are living.
      Appointing a U.S. child to any of these roles requires a careful evaluation of whether it may impact the Canadian residency of the trust for tax purposes. It will be important to consider having multiple executors and trustees, and powers that allow additional executors and trustees to be added to ensure the trust is Canadian-resident when a U.S. child is appointed.
      As well, possible restrictive terms can be included to disallow a non-resident executor or trustee from acting if it would result in there not being a majority of Canadian resident executors and trustees.
   2. Securities Law Issues
      It may be problematic to have your U.S. resident child act as your executor, trustee or attorney for property if he or she will have responsibility for managing investments with a Canadian financial institution.
      U.S. securities law prevents a Canadian investment advisor from providing investment advice to a U.S. resident person unless they are licensed with the U.S. Securities and Exchange Commission to do so. As a result, many financial institutions will not allow a U.S. resident executor, trustee or attorney to have authority on an investment account, which can be problematic.
      However, with careful drafting of a will, trust, or power attorney for property, it is possible to work around these issues so that a U.S. resident executor, trustee, or attorney does not participate in investment decisions. Appropriate legal advice is necessary to deal with these issues since many Canadian parents will wish their U.S. children or grandchildren to take on these roles as their closest and most trusted family members.
   3. Legal Issues
      The Ontario probate process requires a bond to be posted if a U.S. resident person is named as an executor and applies to probate a will.
      The purpose of a bond is to protect the beneficiaries of an estate from loss if an executor is negligent, or there is malfeasance, in which case the insurance company that has underwritten the bond will cover the loss for the amount of the bond.
      In many cases, the bond can be dispensed with or reduced with court approval where the beneficiaries are all adults and agree.
      In other cases, it may not be possible to dispense with a bond, particularly where there are minors, or unknown beneficiaries, which is often the case where there is a trust under a will and the beneficiaries will only be determined at a future date.
      A bond can be expensive, if it can even be obtained, as the insurance company issuing the bond will require substantial financial information and an asset test to be met to ensure the credit worthiness of the applicant executor as part of their risk management in approving a bond. (Read more: our Advisory on Cross-Border Canada-U.S. Estate Administration Highlights.)
4. Personal Care Matters
   Parents usually look to their adult children to act as their attorneys for personal care if their spouse has predeceased them or is not able to take on this role. But what if your child or children are in the U.S. and geography separates you from them? This is a concerning issue for many parents. Consideration can be given to having your U.S. child or children act with a friend, family member or other trusted person who lives close by to provide effective oversight on a practical basis.

Take Aways

Children living in the U.S., or for that matter, living in any foreign jurisdiction, no doubt complicates your estate planning and administration. With that additional complexity comes the need to deal with these challenges in a proactive, thoughtful manner with sound professional advice from trust and estate legal advisors to successfully manage and navigate them.

— Margaret R. O’Sullivan