Probate & Incapacity

Tom, 45, lives in Toronto, ran into a number of unforeseen roadblocks in the process of selling his parents’ condo.

Twenty years ago, Tom’s parents, Susanna and Maurice, purchased their condo in Naples, Florida for $250,000 USD. His parents, both Canadian citizens and residents, wintered there religiously (getting away from the dreary Canadian winters whenever possible). Over time, the condo appreciated in value to approximately $1,000,000 USD. Unfortunately, Susanna passed away last year. Susanna held title to the property solely in her name. With her husband as the main beneficiary of her estate the condo was left to him. According to Florida law, the property is subject to Probate in Collier County, Florida, where the property is situated. Probate is the legal procedure required to transfer legal title to the beneficiaries upon death. As per Florida statutes, Probate may cost up to approximately 3% of the value of the Florida estate, which in this case translates into approximately $30,000 USD. As well as being costly, Probate is time consuming, lasting approximately 8 to18 months and freezes the estate. After completing a long, expensive and demoralizing probate process, Tom came to see us. The situation had become further complicated by the fact that 6 months ago his father was diagnosed with Alzheimer’s disease. With his father unable to travel, and having his own place in Miami Beach, there was no longer a use for the condo and Tom was keen to put it on the market. It was at this point that Tom began to run into more trouble. Legally, the title still remained in his father’s name and only he could sell the condo. With Maurice mentally incapacitated and Tom no longer sure of his options he came to us again. In order for Tom to sell the property he needs to be appointed guardian of his father by the Florida Court. In Florida, a Guardianship proceeding is a legal proceeding under which a person who lacks the ability to manage certain functions of daily living is declared by a Court to be incapacitated. He loses the legal right to make certain decisions including the sale or mortgage of any Florida property. Next, the court will appoint physicians and social workers to make assessments. After the appropriate paper work is filed with the Court an incapacity hearing will take place (it is here that the court will determine if Maurice is incapacitated). Once the Court makes a finding of incapacity a guardian can be appointed. Guardianship proceedings require legal representation, are often quite lengthy and can be costly. After we guided Tom and his family through the Guardianship procedures, we met again to discuss the sale of the condo. Reflecting back on all the difficulties he had been through, Tom asked if there was anything that could have been done to avoid what he had just gone through. Simply, the answer is yes. Creating a Cross Border Trust SM and transferring the title into it would have allowed Tom to completely avoid probate and the long guardianship proceedings. Transferring property into a Cross Border Trust SM, avoids probate upon death as the Cross Border Trust SM does not die, as well, it avoids issues regarding incapacity and guardianship determinations. Rather than going through a guardianship proceeding, The Cross Border Trust SM enables the successor trustee(s) to step in to manage assets without Court intervention. Other benefits in the Cross Border Trust SM include the possible reduction and/or differing of U.S. estate taxes upon death. Additionally, this type of trust will preserve foreign credits in Canada under the Canada/Us Tax Treaty regarding capital gains tax. What does this mean? It means avoiding double capital gains tax (you will pay in the U.S. and get a credit in Canada EX: The IRS rate is 15% and the Quebec rate is 24%, you will be charged 24 % less 15% on your Quebec taxes). The Cross Border Trust SM can also protect the children as beneficiaries against their creditors and/or a beneficiary’s divorcing spouse realizing rights to the property in the Cross Border Trust SM. Fortunately the story does have a happy ending of sorts. With our firm representing Tom, the sale of the condo ran smoothly. We then created a Cross Border Trust SM for his Miami Beach property, protecting his wife and children from going through any of the complicated legal issues such as probate and incapacity.

Issues that Canadians face when buying U.S. Property

Canadian clients contact the cross border experts at Altro & Associates every day, looking for the perfect structure to buy real estate investment/vacation properties in the United States. With all of the distressed property in the U.S., there is no better time for savvy Canadian investors to purchase American real estate. However, Canadians need to be aware of some of the issues that can trip up investors.

The first issue that Canadians need to be aware of is U.S. probate. Probate is the legal procedure used to settle the property of the deceased. Probate will have to be conducted in the U.S. even if your estate is already probated in Canada. Probate is expensive and time consuming. A Florida attorney is allowed by statute to charge 3% of the fair market value of your U.S. assets as a probate fee.

The second issue that Canadians need to be aware of is incapacity. If a property is held in the names of two or more people (such as husband and wife) and one person becomes incapacitated, the property will effectively be frozen. A costly and time consuming guardianship procedure will need to be undertaken to un-freeze the property.

Buying a property in your name or your children’s names may expose the property to creditors should you or your children happen to run into such problems (i.e. a negligence action against you brought by a tenant of your leased property). Further, if you decide to bequeath the property to your children upon your death and they get divorced, their ex-spouse may have a claim for their share of the property, not to mention U.S. Gift Tax issues.

U.S. Estate Tax is another issue of concern to the Canadian buyer. There will be a U.S. Estate Tax upon the death of a Canadian if the Canadian owns more than $60,000 of U.S. Assets and has a worldwide net worth of over $5,000,000. The 35% U.S. Estate Tax is on the total value of all U.S. assets. In 2013, the U.S. Estate Tax law is scheduled to reduce the exemption on worldwide assets from $5,000,000 to $1,000,000 and the Estate Tax rate will increase from 35% to 55%.

A very efficient strategy to address all of these problems is the specially crafted Cross Border Trust℠. A Cross Border Trust℠ speaks to both the Canadian and the U.S. regimes so it can help avoid the issues of probate, incapacity, and provide creditor and divorce protection for your children. Depending on your family situation, the value of your U.S. and worldwide assets, an enhanced version of the Cross Border Trust℠ (called a Cross Border Irrevocable Trust℠) can even eliminate the U.S. Estate Tax altogether. It’s important to discuss all the relevant facts with one of our Cross Border experts beforehand so they can help determine which structure is best for you.

Another potential solution is purchasing your property in a corporation. This will avoid the problems of probate, incapacity and may provide you with some degree of liability protection. However, we often prefer the Cross Border Trust℠ because it is a maintenance free vehicle, unlike a corporation. It is important to note that any capital gains are taxed at a rate of 15% for a Cross Border Trust℠ compared to a capital gains tax rate of 40.5% (in Florida) for a corporation. It should be noted that there are some situations where a corporation is the best solution for our client—specifically, if all of the client’s funds are in a corporate structure. A consultation with a Cross Border Expert will help determine which plan is best suited for you and your investments.

The above are just a few of the pitfalls that can trap unsuspecting Canadians. Canadians should always seek advice from qualified tax and estate Cross Border Specialists. Altro & Associates, LLP can help you in these matters. For a consultation please contact us.

David A. Altro featured in the Calgary Herald

David Altro is featured in this article about tax planning for Canadians owning property in the U.S. Click here to view the article online or scroll down to read the full article.

Have a U.S. property? The tax man cometh
JUNE 29, 2011

As a manager with the Royal Bank of Canada and the owner of a second home in Phoenix, Calgarian Bill McFarlane has two perspectives on tax issues related to U.S. real estate.

He and his wife, Dianne, got expert advice, but he knows from his banking work that many Canadian sunbelt buyers take the home-purchase plunge with little or no tax planning.

“We were concerned first and foremost around potential estate tax issues,” so they talked to a tax lawyer to minimize exposure before buying. “You can get advice from a U.S. lawyer but a lot of it doesn’t apply to Canadians.”

One thing is certain for all Canadians who buy homes south of the border, he says: “At some time or another, we will all have to deal with the IRS (United States Internal Revenue Service).”

Calgary tax lawyer and chartered accountant Bill Fowlis, of Miller Thomson, agrees estate tax is the first area of concern. If you die owning a home in the United States your estate could face a significant tax hit -especially under proposed amendments to estate tax law. Known in the U.S. as ‘death tax’, it is levied on the estate of anyone owning assets valued at more than $60,000 in the U.S. and applies to worldwide net worth. American citizens are granted an exemption of $5 million and ‘aliens’ are given a prorated exemption, based on the percentage of net worth that’s held in the U.S., explains Shashi Malik another lawyer and CA at Miller Thomson.

For Canadians, this means that if you have worldwide assets of $2 million and own a home in Phoenix valued at $200,000, you hold 10 per cent of your net worth in the U.S. and are entitled to 10 per cent of the exemption allowed to U.S. citizens. This works out to $500,000 under the current law. This is far above the value of your U.S. home, so no estate tax is owing upon your death. (If you own U.S. securities, these are also counted and a large portfolio could change the tax owing.)

But the level of exemption is about to change. Fowlis says the current proposal before legislators would reduce the exemption for American citizens from $5 million to $1 million in worldwide assets as of 2013. In the case of a Canadian with total assets of $2 million and a U.S. home worth $200,000, the resulting 10-per-cent exemption on a $1-million ceiling would work out to $100,000, leaving $100,000 of real estate value exposed to state and federal estate tax.

The federal estate tax rate is graduated between 24 and 35 per cent and Arizona has imposed no estate tax since 2005. So your estate could be liable for $24,000 or more in U.S. estate tax. And if your property appreciated in value to $300,000 before your death, your estate could owe $48,000 or more to the IRS. If your heirs plan to sell the home, they can pay taxes from the proceeds of the sale. But if they want to keep the property in the family, they will have to find some other way to pay the taxes.

Fowlis says such calculations assume the current proposal passes into law without change, and that’s far from certain.

“The proposal is to move to a $1-million exemption but you really never know. The last time they changed it, the expectation was an exemption of $3.5 million. But they made it $5 million. At this point, it’s just speculation,” Fowlis says. He recommends buying the second home through a trust or partnership that lives on after the death of the individual and prevents the property becoming part of the estate.

He adds that giving the property to your children before your death doesn’t work because that triggers a U.S. gift tax similar to the estate tax. But he says some clients have deferred the estate tax problem for a generation by having children make the initial property purchase and allowing parents ‘generous use’ of the home.

Montreal tax lawyer David Altro, who assisted the McFarlanes, says he regularly creates cross-border irrevocable trusts, or C-BITs, as the best solution to estate taxes.

“When Canadians die with U.S. real estate (it’s usually because) they want to leave it to their kids.” So they need a trust or other means of ensuring children aren’t lumbered with a big tax bill.

The simplest solution to estate tax is to sell your U.S. property before you die, but this means dealing with capital gains taxation in the U.S. Selling U.S. real estate -and possibly paying capital gains -is also a growing concern for Canadians because many bought in recent months on the expectation depressed U.S. housing prices would rebound within some number of years and generate a profit.

He is skeptical about the chances of any large gain in U.S. real estate values in the short to medium term. Still, even if there is no capital gain, capital gains taxation is likely to be an issue.

The sale of a U.S. property requires filing a U.S. tax return and a payment of tax on any capital gain (after deductions for upgrades to the property). And anyone who buys a U.S. property from an ‘alien’ must, by law, withhold 10 per cent of the purchase price and remit it to the government to cover capital gains by the seller.

Fowlis says anyone selling in today’s market is unlikely to see a significant capital gain but will still face having 10 per cent of the sale price of their property withheld by the title company that functions as a middleman between buyer and seller in U.S. residential real estate transactions. The alien seller can claim this money back on a U.S. income tax form and wait up to a year for a tax refund or he or she can make an application in advance of the sale to have the withholding amount reduced.

Regardless of how much is eventually paid to the U.S. tax man, most Canadians will be taxable in Canada on their worldwide income, including proceeds of that U.S. second home sale. But Fowlis says they can claim the U.S. payment as a deduction against the tax owing in Canada, thus avoiding double taxation.

McFarlane says he considered renting his Phoenix property on a part-time basis, or even buying a second property as a full-time rental. But he says he learned that aliens are required by law to retain an agency to handle rentals and he said he was also less than eager to create a situation that required filing income tax in two countries every year.

© Copyright (c) The Calgary Herald

Radio Show – May 24, 2011

Montreal, Quebec – May 24, 2011

On the March 24, 2011 episode of “Dollars and Sense” on CJAD 800 AM, host, Matt Altro and legal expert David A. Altro discussed various problems and solutions for Canadians who own or who are looking to purchase U.S. property.

In parts 1 and 2, David gives advice on how to choose what area in the U.S. to buy property in, what type of offer to make and issues that can arise, such as probate and U.S. estate tax.

In Part 3, Matt and David take calls from listeners. Jean asks about dual citizenship and inheritance. Rudy wants to know how U.S. and Canadian residency can effects executors of a will and Bob asks about incorporating his business when he moves from Quebec to Ontario.

In Part 4, Catherine asks about shares purchased over 30 years ago and their effect on her ability to get a loan today.

Then, David turns the tables on Matt and asks him about Cross Border Planning Partners, the specialists in helping Canadians move to the U.S.


Part 1

Part 2

Part 3

Part 4