2010 U.S. Estate Tax Update

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December 20th 2010

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For Friends & Clients

On December 17, 2010, President Obama signed into law major changes to the U.S. federal estate tax. This newsletter is for your review. These changes offer opportunities for new estate planning. We encourage you to read the following and consider reviewing your existing estate plan.

David A. Altro, Managing Partner
B.A., LL.L, J.D, D.D.N, Fin.Pl., TEP
Florida Attorney and Quebec Notary

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Highlights of the new 2010 Tax Relief Act

On December 17, 2010 the U.S. House of Representatives passed the “The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010” (“The Tax Relief Act”), which reflects the agreement of congressional leaders and President Obama. This legislation has now been signed into law by the President. Some of the highlights of the Tax Relief Act are summarized below however one key feature of the Tax Relief Act is its duration; the Tax Relief Act only lasts for two years. So all of these changes are fluid and subject to further Congressional debate and future changes.

Changes Impacting Estate Planning

Among other things, the Tax Relief Act includes the following important changes impacting estate planning:

  • First, the estate tax
    has been retroactively re-enacted for those who died in 2010; however, the estate tax has a $5 million exemption (indexed for inflation from 2010 beginning in 2012) and a 35% rate. Estates of persons dying in 2010 can elect to be subject to “carryover basis” instead of the estate tax. The election must be made on a return filed within 9 months of the effective date of the Tax Relief Act. This essentially means that Personal Representatives can elect for the estate/trusts to: (a) be subject to the estate tax and receive a full step-up in basis, or (b) not be subject to an estate tax, but apply a carry-over basis for the decedent’s assets (subject to a limited amount of step-up), whichever the Personal Representatives deem most beneficial.

    Planning Notes: This change in the estate tax law highlights three planning notes:
     

    1. All Personal Representatives and all Trustees who have administered or are administering estates and trusts of decedents who died in 2010 must consult with their tax advisors/attorneys to review this new reporting requirement and their tax planning options.

    2. With the estate tax exemption going up so significantly, all estate planning clients should review their estate plans as soon as possible. While many estate plans will work perfectly under these new rules, the $5 million exemption may frustrate certain clients’ planning intentions, particularly for clients with plans that include gifts to spouses or others (e.g. children from a prior marriage or grandchildren) based on formulas tied to the estate tax exemption – and virtually all plans for married clients are.

    3. As a result, Canadians who own U.S. assets such as U.S. real estate and shares of stocks in U.S. companies held personally will not be subject to U.S. estate tax where their worldwide estate is less than $5 million at death. However, remember the new law sunsets in 2 years whereupon the exemption drops back down to $1 million unless there are new tax law changes.

  • Second, for U.S. residents the gift tax exemption remains at $1.0 million for 2010, but starting January 1, 2011, the gift tax exemption is re-unified with the estate exemption (i.e., the gift tax exemption increases to $5.0 million). In addition, the gift tax rate for 2010, 2011 and 2012 is 35%. This major increase in the gift tax exemption (coupled with the increase in the GST exemption – below) is extremely valuable to high net worth clients.

  • Planning Note: After January 1, 2011, clients should consider the benefits of making substantial gifts to multigenerational trusts for life (“dynasty” trusts) to lock in the gift tax exemption opportunity and shift assets, as well as the income and appreciation on those assets, out of their taxable estates.
    This is extremely advantageous for Canadians whose child or children reside in the U.S. or are dual citizens.

  • Third, the Generation-Skipping Transfer Tax (“GST”)
    has been retroactively re-enacted for 2010. While that sounds bad, the good news is the GST tax rate for 2010 is zero. This provision of the Tax Relief Act is actually helpful as it clarifies the GST consequences of transfers made by gift or from estates in 2010, and confirms those transfers are subject to all the rules that previously existed, but the rate in 2010 is zero. For example, for any clients who made taxable gifts to grandchildren or younger generations (or to trusts for them) during 2010, they now have the GST tax impact clarified – there will be no retroactive GST tax to pay. In addition, the Tax Relief Act clarifies that direct skip gifts in trust or "taxable distributions" in further trust for grandchildren in 2010 will incur no current GST tax and would not have the potential problem of having the GST tax apply to later distributions from the
    trust to the grandchild. If clients have GST non-exempt trusts and are making distributions in 2010 or if clients are considering GST transfers in 2010, this clarification is helpful. Starting in 2011, the GST exemption will equal the gift and estate tax exemptions – $5 million. This increased GST exemption can be allocated to 2010 transfers or to 2011 or 2012 transfers.

  • Planning Notes:

    1. The GST provisions of the Tax Relief Act provide valuable support for Personal Representatives and Trustees of 2010 decedents, who will have to file estate tax returns. Without this clarification, there was great confusion on how transfers from estates would be treated and reported for tax purposes.

    2. The $5 million (increased) gift and GST tax exemptions available after January 1, 2011 offer many clients the opportunity to make substantial gifts to dynasty trusts for their families, and to make even more substantial loans or sales of assets to such dynasty trusts. For clients who have already made gifts or sales to dynasty trusts, the new exemptions offer opportunities to either add additional “seed” money to the trusts or to reduce the promissory notes they are holding.

  • Fourth, the Tax Relief Act offers portability

    of the estate tax exemption between spouses if the first spouse to die does not use all of his or her exemption. However, the portability provisions offer several pitfalls. First, clients can only avail themselves of the exemption of their last spouse to die – i.e. they cannot “stockpile” exemptions from more than one spouse. Second, as a result of this “last spouse” limitation, it is possible that remarriage by a surviving spouse could cause the loss of the portability if the new spouse predeceases the client but uses his or her full estate tax exemption. Estate tax portability might help some couples who have not planned their estates, and it offers a full “step up in basis” on the assets at the 2nd death, but many clients who plan ahead will be better served by continuing to use Credit Shelter Trusts (“CST”), which have
    a number of advantages over portability. Relying on portability does not leverage the estate tax exemption of the first to die; if assets appreciate and there is no CST, the appreciation is fully taxable in the surviving spouse’s estate. If the assets appreciate after the first death in a CST, the appreciation passes tax free to the family. Also, portability does not preserve the GST exemption of the first spouse to die as the GST exemption isn’t portable. This means that unless used during their lifetimes, a couple relying on portability can only exempt $5 million on death from the GST. On the other hand, by applying GST exemption to a CST after the first death, clients can ensure use of both spouses’ GST exemption, and exempt $10 million instead of $5 million for their families. Finally, without a CST, the assets the surviving spouse inherits will not be
    protected from creditors or future spouses of the surviving spouse.

  • Planning Note: Based upon the reasons highlighted above, many clients will still benefit by using CSTs in their estate plans, and CSTs will still be recommended.

  • Fifth, to provide some leniency in recognition of the estate tax rollercoaster ride, the Tax Relief Act provides additional time for Personal Representatives and Trustees of estates of persons dying in 2010 to make certain elections and file certain returns. In general the deadlines for actions such as disclaimers and/or filing an estate tax return are extended until 9 months from the effective date of the Tax Relief Act.

  • Sixth, as noted previously, all of the amendments in the Tax Relief Act will sunset in two years (so expect another political battle – especially with a Presidential election in 2012).

Other Changes for Individual Taxpayers

Among other things, the Tax Relief Act includes the following other important tax changes for taxpayers:

  • The Tax Relief Act continues (at least through 12/31/2012) at the 15% long term capital gains rate which is applicable also to Canadian residents, which would have gone up to 20%.

Summary Chart of Estate, Gift and GST Tax Law

 

2010

 

 

2011-2012

 

Estate Tax

Exemption amount: $5,000,000*

Tax rate: 35%

Carryover basis: Option to
elect
carryover basis

Estate Tax

Exclusion amount: $5,000,000*

Tax rate: 35%

Carryover basis: Not applicable

Gift Tax

Exemption amount: $1,000,000**

Tax rate: 35%

Gift Tax

Exclusion amount: $5,000,000**

Tax rate: 35%

 

*For Canadian residents provided they are not also U.S. citizens, the exemption amount of $5,000,000.00 is calculated on such person’s worldwide estate as of the date of death. All assets are included in such calculation, without limitation to RRSPs and life insurance.

 **For U.S. residents

A special thanks to Jeff Baskies, attorney, for his valuable contributions to this newsletter.

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Altro Quarterly Update Winter 2010

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Introducing the Cross Border Video Series

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We frequently receive questions and concerns from clients regarding cross border tax, estate planning, real estate, and immigration.

In response, we have compiled a short video series with real life questions received from listeners of our radio show. Click here to watch as Managing Partner David A. Altro, Florida Attorney & Quebec Notary, provides advice, commentary and guidance in his well-humoured demeanor.

Our most popular episodes include:

You can also watch the videos on our Facebook Page, and share it with your friends.

Join the conversation by leaving questions and comments on our Youtube page for our cross border attorneys!

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Recession, Robo-Signers, and Recalls

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Many Canadians looking to scoop up bargain Real Estate in Florida are finding themselves in a whole lot of hot water, instead of on the sunny beaches of their dreams. In fact many are now asking themselves “if we bought it…don’t we actually own it?” For many the answer, sadly, is no.

We at Altro & Associates, LLP are often asked why an attorney is needed if a title company has been appointed in a U.S. real estate transaction. That same question was also asked by Sonja Kleiman, a paralegal at our firm. The present article will shed some light on why!

A few weeks ago, I was contacted by a buyer we represented in a foreclosure closing in Florida and she was concerned about a recent report aired on CBC’s the National- In Depth & Analysis Report covering the Florida foreclosure fiasco, which raised a red flag for any Canadian who has recently purchased or is thinking of purchasing real estate in Florida.

As real estate attorneys practicing law in the wake of the subprime mortgage crisis, Florida, a favorite getaway and even permanent residence for many Canadians, was hit by a tidal wave of bank foreclosure and repossession cases. Unable to cope with the overload, banks and realtors recruited any and everyone to push through paperwork as quickly as they could, foregoing proper title examinations, forging documents, or simply skipping key signatures, formalities and rubberstamping affidavits without properly verifying authenticity in an attempt to move what was rapidly becoming billions of dollars in stagnant inventory. Read more…

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Altro on the Radio Waves

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Listen to David A. Altro, Florida Attorney, Quebec Notary and Canadian Legal Counsel and host Matt Altro, CFP and Chief Operating Officer of Altro & Associates, most recent episode of "Dollars and Sense" on CJAD AM 800 .The Altros always deliever good humored and spirited discussions on legal issues related to cross border and domestic tax, estate planning and real estate.

The next episodes are scheduled after the new year:

• January 20, 2011
• February 7, 2011
• March 7, 2011

If you missed the recent live shows, you can download them in MP3 format from our website:

October 19, 2010

November 25, 2010

Be sure to check out our expanded Radio Shows page on our website where you can listen to other previous shows, highlighted clips and submit questions to be answered on upcoming shows.

 

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We Can’t All Be the Boss, or Can We?

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George Steinbrenner, the former billionaire owner of the New York Yankees, is widely known as “The Boss”. This is a fitting moniker: Steinbrenner’s hands-on leadership style pushed the Yanks to win 7 World Series victories during his tenure, an accomplishment that undoubtedly made The Boss proud.

As if solidifying his nickname for all eternity, Steinbrenner passed away in July 2010, which, by U.S. tax measures, is a pretty good year to die; due to Bush-era legislation called the Economic Growth and Tax Relief Reconciliation Act of 2001 (the “Act”), U.S. estate tax has been repealed for the duration of 2010. It’s safe to say that Steinbrenner showed the IRS who’s boss – he saved his heirs half a billion dollars by dying before the new year.

The Act increased exemption amounts periodically from its 2001 inception, so that by 2009, the effective exemption from U.S. estate tax was $3,500,000 USD, and by 2010, estate tax was eliminated. The Act’s sunset clause is responsible for the return of U.S. estate tax in 2011, when it will cast a wide net. Read more…

 



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So Patriotism Just Isn’t Your Thing

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Many dual Canadian and U.S. citizens have toyed with the idea of renouncing one of their citizenships in order to remove themselves from a taxation system. As the United States has most recently passed new legislation, we will look at the U.S. taxation issues for U.S. expatriates.

This new legislation entitled The Heroes Earnings Assistance and Relief Act, the “Heart Act” or the “Act,” was signed into law on June 17, 2008 and applies to individuals who relinquish their U.S. citizenship or long term U.S. residency on or after June 17, 2008 and who meet any one of the following: a) have an average annual net income tax liability of more than $139,000 USD for the five (5) years preceding expatriation; b) have a net worth greater than or equal to $2,000,000 USD on the date of departure; or c) have failed to provide certified compliance with U.S. tax obligations for the five (5) years prior to expatriation. Despite the criteria mentioned above, there are however exceptions for certain individuals which would remove them from the implications of the Heart Act.

Read more…

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Cross Border Planning Partners Workshops

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Experienced cross border professionals will conduct workshops in cross-border currency exchange, U.S. immigration after 9/11/01, and estate planning. We will provide you with strategies and information in an attempt to get the best of the Canadian and U.S. tax systems; take advantage of currency exchange rates; receive your Canadian RRSPs tax-free or nearly tax-free in the U.S.; find investments exempt from U.S. income taxes and withholding; and maximize Medicare benefits, just to name a few. General question and answer sessions will also be held to address your specific concerns.

Wednesday, January 26, 2011
The Ritz-Carlton
2401 E. Camelback Rd.
Phoenix, Arizona 85016

Tuesday, February 1, 2011
Rancho Las Palmas Resort & Spa

41-000 Bob Hope Drive
Rancho Mirage (Palm Springs), California 92270

Tuesday, February 8, 2011
The Ritz-Carlton
280 Vanderbilt Beach Road
Naples, Florida 34108

Thursday, February 10, 2011
Boca Raton Resort & Club

501 E. Camino Real
Boca Raton, Florida 33432

To register for the above seminars please call 1-877-839-7111 or email Matt Altro at maltro@cbplanningpartners.com.

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Altro Quarterly Update Fall 2010

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Dollars & Sense Radio Show

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Join David A. Altro, Florida Attorney, Quebec Notary and Canadian Legal Counsel and host Matt Altro, COO of Altro & Associates, tonight Thursday September 16th at 7pm on their monthly radio show, “Dollars and Sense” on CJAD AM 800.

Tonight, David and Matt will host a good humored and spirited discussion on legal issues related to cross border and domestic tax, estate planning and real estate issues.

Be sure to check out our expanded Radio Shows page on our website where you can listen to past shows, highlighted clips and submit a question for an upcoming show.

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Upcoming Cross Border Seminars

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David A. Altro will be a guest speaker at several upcoming Montreal seminars. He will be presenting on cross border tax, estate planning and real estate issues.

September 28th 2010 from 8:30am-11:00am

Marriott Chateau Champlain
3500 Ch Du Souvenir
Chomedey, Quebec
H7V 1X2

September 28th 2010 from 7:00pm-9:30pm

Le Chateau Royal (Laval)
1 Du Canada Place
Montreal, Quebec
H3B 4C9

September 29th 2010 from 7:00pm-9:30pm

Hôtel ALT Quartier DIX30 (Brossard)
6500 boulevard de Rome
Brossard, Quebec
J4Y 0B6

Sign up and attend »

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David Altro featured in STEP Journal

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This article will look at the various tax and estate planning issues facing Canadians with special emphasis on the major impact of changes in the US estate tax rules under the US Internal Revenue Code (the Code) affecting Canadians. As of 1 January 2010, a Canadian owning US assets upon death in 2010 will not be subject to any US estate tax…

Read the article »

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Ontario Attorney Leanne Milech (B.A. LL.B.) joins our Toronto Office

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Prior to joining Altro & Associates, Ms. Milech was a Business Law associate at Heenan Blaikie LLP in Toronto.

Ms. Milech’s practice focuses on general corporate matters with a particular emphasis on mergers and acquisitions, share and asset purchase transactions, financing transactions and entertainment law matters.

As a law student, Ms. Milech gained labour law experience at the Screen Actors Guild in Los Angeles as well as entertainment law experience at Taylor Mitsopulos Klein Oballa in Toronto.
Ms. Milech earned her Bachelor of Laws from the University of Western Ontario in 2008. She received her B.A. in Film and Religious Studies from Queen’s University in 2004 with honours, graduating on the Dean’s List.

Read more »

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Bumping up Your ACB

InlineBy Amanda Shear B.A., J.D.

Under the Foreign Investment in Real Property Tax Act (“FIRPTA”), a person or entity purchasing a U.S. real property interest from a foreign person is required to withhold ten percent (10%) of the amount realized upon sale (gross sale price) from a foreign owner. Read more to find out how to take advantage of the capital improvements initiates to increase your basis under FIRPTA!

Read more »

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Moving to the U.S. the Canadian Way

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By David A. Altro B.A., LL.L., J.D., D.D.N., Fin.Pl., TEP

Why do Canadians move to the US?

If you find the weather in Canada difficult, the Sunbelt certainly offers a better weather alternative. If you have loved ones who you miss living in the States then what can be more important than to be near family? Our clients who move to the US generally enjoy lower income tax and a higher after tax net in their pocket on an annual basis. And of course, if an attractive business opportunity knocks south of the border then why not?

Read the article »

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