Clients who’ve headed south for the winter may be looking at buying a U.S. vacation home. In fact, Canadians are the leading foreign purchasers of U.S. real estate. If your clients are considering buying a U.S. vacation property, here are some tips to help them structure title and ownership to minimize tax and estate planning consequences for themselves and their heirs.
Title and ownership
It’s possible to hold U.S. real estate directly, in one name or jointly. However, a U.S. estate tax liability can arise when an owner of the property dies, at a rate of up to 40% for 2013 and 2014.
U.S. estate tax generally arises where the worldwide estate for U.S. estate tax purposes exceeds the available exemption amount, which is up to $5.25 million for 2013 and $5.34 million for 2014.
Problem is, if a property’s jointly held, its value can be taxed twice. Even if the owners owe no U.S. estate tax, their executors may have to file returns after an owner dies (even if the other owner is alive).
There can also be requirements for local probate fees and additional legal costs and court fees after an owner dies.
It used to be popular for Canadians to hold U.S. real estate in Canadian corporations. However, CRA now applies a taxable benefit where a shareholder uses the property personally, which can result in additional taxes. If this planning was put in place before 2005, chances are it’s grandfathered and clients won’t be affected, but it’s no longer generally recommended to use Canadian corporations to hold U.S. personal use property.
Using a trust
Using a trust to hold U.S. real estate is a better option. A trust is a relationship in which one person (the settlor) transfers the title of assets to another person (the trustee), who holds the assets for beneficiaries.
A person can settle a trust for the benefit of her spouse and children and gift money to the trust, and in turn, the trustees can purchase U.S. real estate registered in the trust’s name. If properly planned, that would mean the real estate would not considered and taxed as part of a settlor’s U.S. estate.
To keep this onside U.S. tax rules, the contributor to the trust (settlor) cannot retain certain kinds of control of the trust’s assets. Also, since the trust does not die when the contributor does, it’s possible to avoid probate and additional legal costs and court fees.