No doubt many U.S. legislators were chewing on tax reform over the U.S. Thanksgiving weekend, as well as enjoying their turkey, as unprecedented momentum is moving U.S reforms ahead at breakneck speed demonstrating Congress’s desire to complete tax reform before year end.
The proposed changes will be the most significant to the U.S. tax system in over three decades, and will impact many individuals and families with U.S. connections. Several major areas are impacted, including U.S. estate and gift tax.
The House Bill that passed on November 16, 2017 includes several major changes to transfer taxes. Under the House Bill, an estate worth less than $10 million in 2011 will not be subject to estate, gift or generation-skipping transfer tax. For a married couple, this will mean that between them the exclusion will be $20 million. These amounts are indexed to inflation for transfers on death. For 2018, the exclusion will be $11.2 million for an individual person, and $22.4 million for a married couple.
As well, under the House Bill, the estate tax and generation-skipping tax would be completely repealed by January 1, 2025. Of interest to Canadian citizens married to a U.S citizen is that there are also helpful provisions for U.S. citizens married to a non-U.S. citizen spouse. Current rules do not allow for a complete deferral of estate tax that would apply between two married U.S. citizen spouses unless the inherited property is transferred after death into a special trust called a qualified domestic trust for the surviving non-U.S. citizen spouse. These rules have been liberalized and revamped, including a provision that if the surviving spouse dies after December 31, 2024, there would be no estate tax on the property left in the trust.
The Senate has put forward its own tax reform bill as tax reform moves down parallel tracks with the House. The Senate Bill also proposes doubling the estate tax exemption as outlined above, but does not propose a permanent repeal of the estate tax. Instead, there is a sunset provision whereby the exclusion amount would return to its current amount on January 1, 2026. In a complicated process, it will be for the Senate and the House to attempt to reconcile their differences by conference and then push forward to a vote on the revised bill in both chambers.
No doubt, if tax reform succeeds, it will have a significant impact on many individuals with U.S. connections. It can be forecast that there will be less of a need for complex planning for many because the higher exemption amount will provide a sufficient exclusion from estate tax, which is very good news – whether for the couple with U.S. children who are concerned that the inheritance they leave their U.S. children will ultimately be subject to U.S. estate tax on a child’s death, to the family that wants to purchase a U.S. vacation home where the higher exemption based on a number of factors in certain cases can provide additional relief.
Over the next few weeks, stay tuned as the U.S. appears positioned to make some very dramatic changes to its tax system.
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.