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Wealthy families watch U.S. elections with ‘death tax’ in mind

Depending on which party wins, those with U.S. tax exposure should consider doing some complex estate planning

As the U.S. presidential and congressional elections approach this November, many Canadians are keeping a close eye on things. Among them are wealthy families with ties to that country who are thinking about potential changes to estate tax legislation.

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The outcome could significantly affect U.S. citizens living in Canada as well as Canadians who own high-value property south of the border.

At the heart of the debate is the lifetime exemption for the U.S. estate tax,  known as the “death tax” by Republicans. The exemption currently stands at about US$13 million per person, or about US$27 million for a married U.S. couple.  

Earlier this year, the Republicans re-introduced legislation to repeal the estate tax entirely. Without bipartisan support, however, it’s unlikely to pass. 

Depending on which party takes control of the White House and Congress, the lifetime exemption for the estate tax could remain stable or drop to around US$7.5 million when the rule “sunsets” in 2026.

For people with cross-border interests, understanding the implications of these scenarios is crucial to safeguarding their wealth, experts say.

U.S. citizens living in the U.S. or Canada are taxed on their worldwide incomes and are subject to U.S. estate tax on their worldwide assets, according to Calgary-based Ved Aswani, partner and national U.S. tax leader at RSM Canada.

“The higher exemption simply means that many estates will not owe any U.S. estate tax, thereby reducing the need for complex estate planning,” he wrote in an email.

With the larger exemption, few estates pay any U.S. estate tax, says Margaret O’Sullivan, managing partner at O’Sullivan Estate Lawyers in Toronto. “I think in 2021, only about 3,000 estate tax returns were filed, and about 1,800 had to pay any tax.”

But if the exemption drops to US$7.5 million, the number of those who have to pay will increase.

Worried about the sunset provision

Canadian residents who are not U.S. citizens, green card holders or residing south of the border may also be affected by an exemption change. O’Sullivan says right now everything is up in the air and depends on who wins the U.S. presidency and who controls Congress.

Aswani says many advisors, including lawyers and accountants, “are worried about this sunset provision for their clients and are recommending taking advantage of the current higher exemption amounts before they potentially decrease in 2026.

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“Given it could have a significant impact on the beneficiaries, it’s best to plan for it in advance if you think your estate may trigger it,” he says.

O’Sullivan says nothing is likely to happen until the end of 2025. But even then, it depends on who wins what.

“Depending on which president we have and depending on who controls the House, that’s the other issue,” she says. She points out that nearly a decade ago, an entire year passed in which there was no U.S. estate tax because the House of Representatives wasn’t able to agree and pass legislation on the amount.

Still, while we wait, the affected families should consider more complicated planning, both experts say.  

Gifting

One simple option is gifting, Aswani says. “It’s the most common and underrated strategy” for Canadians with U.S. tax exposure, he says.

A husband and wife can each give $18,000 tax-free per child—or, indeed, any person—in 2024. In January of 2025, that figure rises to $19,000.  Anything under that amount is not taxable.

“We have clients who have 5 children and 12 grandchildren. You see where I am going with this. That’s a lot of money,” he says.

The annual exclusion doesn’t have to go to family members, he says. It can go to other entities or organizations, such as qualifying charities, foundations or political groups, without tapping into your lifetime exclusion.  

“U.S. citizens in Canada can also consider giving larger gifts now to take advantage of the higher exemption amounts. I will caveat that by saying that the larger gifts will require you to file a gift tax return and will count toward your lifetime estate tax exemption amount.”

Trusts

O’Sullivan says families affected by a reduction in the lifetime exemption for the U.S. estate tax might consider a trust.

“The person who’s contributing the value doesn’t have a retained interest,” she says. The assets are transferred, but the grantor has the right to receive income from those assets for a period of time.

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“They’re not a beneficiary. They don’t control the trust, and when they pass away, there isn’t any ownership interest that would make them subject to U.S. estate tax. The trust is structured very carefully so that the beneficiaries as well don’t have too much control or ownership, so that when they die, it’s not subject to U.S. estate tax.”

For Canadians facing U.S. exposure through real estate, Aswani says there are a couple of alternate ways for Canadians to hold their U.S. property, including a cross-border trust, a Canadian holding company or a partnership.

“Each structure is unique and has its benefits and challenges. Canadians considering investing in U.S. real property must retain competent tax counsel on both sides of the border,” he says.

O’Sullivan reiterates this sentiment. No matter the results of the election in the next few weeks, if there is a risk of exposure, seek expert help.

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