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U.S. Estate Tax: Heading Toward the Cliff on January 1, 2026

There is increasing uncertainty about the future of U.S. estate tax. On the one hand, under U.S. legislation that temporarily halved the lifetime exemption amount passed during the Trump administration, the lifetime exclusion amount is set to decrease on January 1, 2026, to $5M (USD) adjusted for inflation since 2011, unless legislation is passed by Congress.

On the other hand, with Presidential and Congressional elections in the Fall, the ball is in the air depending on their outcomes. The Trump administration reduced the estate tax to its lowest level ever, and Republicans have endorsed a complete repeal of the estate tax and cuts to the gift tax.

On January 19, 2024, Republicans re-introduced legislation to permanently repeal the federal estate tax, which they call the “death tax”, under the Death Tax Repeal Act, which follows past attempts to abolish the estate tax. It is expected that without bipartisan support, it will not pass through Congress given the current split in Congress.

Congress will be under increasing pressure in 2024, and even more so in 2025, to deal with a number of tax cuts that came into effect in 2017 (along with the reduction in the estate tax), which also sunset on December 31, 2025.

Which all makes estate planning very challenging given such uncertainty.

As an update, the lifetime exemption in 2024 is now $13.61M (USD) per person and for a married U.S. couple $27.22M (USD). It is expected that in 2026, if the sunset comes into effect, it could decline to $7.5M (USD) per person, and $15M (USD) for a married couple, depending on the inflation rate over the next couple of years.

For U.S. persons who are subject to U.S. estate tax, it is time to get advice and not wait with regard to appropriate planning, including possible gift planning that may be relevant to their situation.

For Canadian residents who are not U.S. citizens, green card holders or otherwise considered domiciled in the U.S. for U.S. estate tax purposes, and who have U.S. situs property, the reduction by half in the exemption amount for U.S. estate tax could have a significant impact.

If you have U.S. situs property and on your death if your worldwide estate is above the lifetime exemption amount (currently $13.61 (USD) per person as noted above, including if you own U.S. real property, directly-owned shares of U.S. companies (even if held in a registered account such as a RRSP, RRIF or TFSA), or tangible personal property situated in the U.S., as well as certain other property, you can have U.S. estate tax exposure. Under applicable U.S. rules, the calculation of your worldwide estate includes your interest in jointly owned property, death benefits under certain insurance policies, and interests in certain trusts.

Many Canadians will not have a worldwide estate over $13.61M (USD), but if the exemption falls to $7.5M (USD), many more will have an estate tax exposure and need to consider the amount of their exposure and available planning options to minimize it.

U.S. estate tax rates begin at 18% and reach the top rate of 40% once U.S. situs assets exceed $1M (USD).

Certain relief against U.S. estate tax is available under the Canada-U.S. Tax Treaty which is relevant for those whose worldwide assets exceed the U.S. lifetime exclusion amount, and as well there is a basic general exemption amount of $60,000 (USD) which covers U.S. situs assets up to that amount. A detailed calculation is necessary to determine the amount of your exposure to U.S. estate tax.

Expect only more uncertainty given the many variables at play as we head toward the cliff on January 1, 2026.

— Margaret O’Sullivan

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. Before taking any action involving your individual situation, you should seek legal advice to ensure it is appropriate to your personal circumstances.