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U.S. Estate and Gift Tax Planning – Considerations for 2013 and Beyond

Canadians with connections to the U.S., including those who own U.S. assets or have family south of the border, watched with interest as the American Taxpayer Relief Act of 2012 (“ATRA”), became law in early January 2013. The ATRA answered important questions about the future of U.S. transfer taxes, including estate tax, gift tax, and generation-skipping transfer tax. This blog post provides an update on ATRA in context, and highlights some current planning opportunities.

As a refresher, U.S. transfer taxes have changed significantly in recent years. As part of a broader tax package, the Bush Administration’s Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA”) reduced estate and gift taxes, lowering the top estate tax rates (from 55% to 45%) and increasing estate tax exemptions (from $675,000 in 2001 to $3.5 million in 2009 (all amounts in USD)) and would have repealed estate tax for 2010. However, EGTRRA contained a sunset clause to reinstate lower exemptions and higher rates effective in 2011. Late in 2010, Congress passed a bill retroactively imposing estate tax for 2010 (with a top rate of 35% and a $5 million exemption), and extending these rates and exemption to the end of 2012. Only about 14% as many U.S. estate tax returns were filed in 2010 as in 2001, and fewer than half of the filers in 2010 owed U.S. estate tax. The U.S. is not alone in taxing wealth or wealth transfer, or imposing taxes on death: 28 of 34 OECD (Organization for Economic Co-Operation and Development) nations did so in 2009.

The key features of the new legislation ATRA, in our view are:

• It makes permanent an historically high unified gift and estate tax exemption of $5 million indexed for inflation ($5.25 million for 2013), subject to future legislation. It is estimated that ATRA may eliminate U.S. estate tax for approximately 99% of the U.S. population;

• It provides for a top estate tax rate of 40%; and

• It continues portability of any unused exclusion amount from a deceased spouse’s estate to that of his or her surviving spouse, subject to conditions.

As a result, there continue to be opportunities for U.S. citizens and Canadians owning certain U.S. situs property to transfer wealth during their lifetimes and on death with minimal if any estate and gift tax liability. Generally, where an estate or U.S. assets are subject to U.S. estate tax (see our previous blogs, “U.S. Securities and Other ‘U.S. Situs Property’ – U.S. Estate Tax Issues for Canadian Residents Who are Not U.S. Citizens or Residents” and “Who May Be a U.S. Citizen and Why It Matters For Estate Planning and Tax Compliance“, about who may be liable for U.S. estate tax and why) no U.S. estate tax will be payable where the worldwide estate is valued at less than the present exclusion amount of $5.25 million. If a marital credit applies under the Canada-U.S. Tax Treaty regarding assets passing to a surviving spouse, there may be no tax payable on an estate valued at almost twice that amount. Alternately, if the U.S. marital deduction is available, U.S. estate tax may be deferred on an additional amount passing to a surviving spouse, which at the latest would be until the surviving spouse’s death, subject to terms and conditions.

Another consequence: U.S. persons may gift substantial property during their lifetimes without paying U.S. gift tax. Gift tax, which is imposed on the donor, applies generally to gifts by U.S. citizens and other U.S. persons. It also applies to gifts of certain U.S. property by individuals who are not U.S. persons. Gifts not subject to the U.S. gift tax include for example those within the annual exclusion amount (generally $14,000 for 2013). Under the new legislation, gifts made by U.S. persons above that amount can be sheltered by the unified credit (i.e., the $5.25 million unified gift and estate tax exemption), although this may increase the estate tax on death by decreasing the unified credit available on death. With continued indexing for inflation the amount of the gifts which can be sheltered by the unified credit, where applicable, could increase substantially over the coming years.

Given the historically high exemption amount, U.S. persons and those with U.S. connections are encouraged to revisit their estate planning, and where applicable, consider the various options available for gifting during their lifetimes and on death.

The comments offered in this article are meant to be general in nature, are limited to the law of Ontario, Canada, and are not intended to provide legal or tax advice on any individual situation. In particular, they are not intended to provide U.S. legal or tax advice. Before taking any action involving your individual situation, you should seek legal advice to ensure it is appropriate to your personal circumstances.