If a client mentions that his family members live and work abroad, and that they’re named in PoAs, suggest he review his estate plan.
Why? Non-resident PoA holders face hurdles. For instance, some investment firms may be unable to take instructions from non-resident attorneys. And, the tax filing requirements for non-resident attorneys for property can be onerous, depending on the property’s value. So, your client needs to discuss these implications with any attorneys who live outside of Canada.
We spoke to two estate planning experts to detail these issues. They are:
- Beaty Beaubier, a tax and estate lawyer at Stevenson Hood Thornton Beaubier LLP in Saskatoon, Sask.; and
- John Johnson, a wills and estate-planning lawyer at Nelligan O’Brien Payne LLP in Ottawa, Ont.
Q: If a client has appointed an attorney for property, and that person moves out of the country, what are the issues?
BB: Many investment dealers aren’t registered in the U.S. So, if a U.S.-resident attorney were to provide securities trade instructions to a Canadian investment dealer, a problem could arise. If the Canadian dealer is not registered in the state where the attorney is resident, then that dealer is unlikely to be permitted by law to accept trading instructions on behalf of the Canadian-resident donor of the PoA.
Let’s say an attorney is acting on behalf of an incapacitated family member. If the attorney resides in Florida and their investment dealer isn’t registered in that state, then the dealer can’t accept the trading instructions.
But, this problem only applies if a PoA is considered a non-resident from the perspective of where he is resident. So, if I was naming my child who was going to college in the U.S. for four years, I wouldn’t consider that an issue from a residency point of view, as long as the child remains a Canadian resident. But it’s a problem if my child then graduates and permanently relocates to the U.S. (see “Residents vs. non-residents,” this page).
Another issue arises if a U.S. resident has signature authority over a Canadian donor’s Canadian bank and investment accounts. When the aggregate value of those accounts exceeds $10,000, attorneys must file the FinCEN Report 114 with the IRS annually. Unfortunately, the rules are drafted so broadly that they pick up the concept of simply having authority over somebody else’s bank account because you’re that person’s attorney.
The FinCEN Report provides financial details of the Canadian accounts. It can be quite tedious to fill out, and penalties can arise from mistakes. If a U.S.-person attorney misses an account, for instance, he may be liable for potential penalties, which will be calculated as a percentage of the highest value of that missed account during the year.
This filing risk ends up being a deterrent in many cases for prospective cross-border attorneys. Another problem is that the IRS will find out about a donor’s bank accounts, RRSPs and TFSAs (and information about any corporate accounts that are handed over) if U.S.-resident attorneys have signature authority.
So the donor will lose privacy of information to another country. When I explain that to Canadian clients, they say, “You mean I’m going to be giving that kind of information to the U.S. government?”
Q: If a client has no family or friends in Canada to appoint, what are his options?
BB: Suggest a trust company, which helps avoid some cross-border tax problems (but not others—see “Tax concerns for CCPCs,” this page).
Alternatively, clients can ask professionals, such as lawyers or advisors, to be their attorneys. But an advisory firm may deem it a conflict of interest. Many firms and regulators don’t want advisors to take on attorney or executor appointments. It may also be an issue in the accounting field if the client picks his accountant to be his attorney.
Tax concerns for CCPCs
If your client is the owner of a Canadian-controlled private corporation (CCPC) and he picks a trust company as attorney for his controlling interest in the corporation (i.e., his shares), he could face challenges, says Beaty Beaubier, a tax and estate lawyer at Stevenson Hood Thornton Beaubier LLP.
Why? Many trust companies are either a subsidiary of Canadian banks, which are public corporations, or of foreign corporations, he says. But to meet the definition of a CCPC, a client’s corporation “cannot be controlled by non-residents or by public companies, either directly or indirectly,” explains Beaubier.
If a client’s company is no longer considered a CCPC, the company will not be able to reap the benefits of that tax status.
Those tax benefits include:
- the small business deduction, which allows the corporation to get a lower tax rate on the first $500,000 of active business income each year; and
- if a CCPC earns investment (passive) income but pays that income out as taxable dividends to shareholders, the company may get a partial income tax refund.
Wherever possible, the business owner should use a Canadian resident family member, friend or business partner to act as attorney.
Still, non-resident property attorneys aren’t common. In fact, most lawyers try to avoid such situations. When I’ve seen non-resident PoAs, I’ve raised the issue. And, fairly quickly, clients have taken steps to get rid of non-resident attorneys. At a minimum, people take about a week to think about whom they want to choose as alternates.
I recently worked with a client who is an elderly man in his early 60s, who had to choose alternate attorneys; he has no wife or children, and his only family is in the U.S. But, he has a number of close friends who reside in Canada, and asked one of them to be his attorney for property. So, when going through estate planning, have clients consider whether appointed persons are planning to move, or if they have careers that require moving (see “Worst-case scenario,” this page).
Q: Say a client has a non-resident named in his PoA for personal care. What are some of his main concerns?
JJ: A personal care attorney is only exercised when the person who made the appointment can’t give medical instructions.
If a client is competent, the only concern we have is there may be a medical event in the future that requires the immediate attention of his attorney. If that appointed person is hard to reach, there may be delays in care decisions.
So, although nothing stops a non-resident from exercising her rights as personal care attorney, she won’t be there to talk to doctors or family immediately [when something goes wrong], and she won’t be there to figure out exactly what’s been going on health-wise.
To avoid this, clients can appoint several personal care attorneys, or even a healthcare committee, of which non-resident family members could be a part. But I don’t always recommend this because you’ve got more people to talk to when making a decision.
Instead, the client could ask a friend or neighbour, provided he explains the responsibilities of attorneys for personal care. He should also produce a memorandum outlining his healthcare wishes, such as do-not-resuscitate orders. He can write this memorandum with the help of a lawyer before drafting a PoA.
BB: But, you should let the client know that, even where a business associate or friend is prepared to look after his property, that person may not want to make personal life decisions. Many people see that as a family-based matter, so it can hard to find substitutes.
JJ: However, it could be in the client’s PoA documents that his Canadian-resident attorney would be directed to consult with members of his family. The attorney would make the decisions, but would have family members’ phone numbers and emails.
If the client has nobody else to turn to, including friends or family, his healthcare decisions will be made by the Office of the Public Guardian and Trustee in his region. The only problem is the OPGT just makes overall care decisions; it doesn’t provide the kind of help people often get from family members and friends.
The situation: Judith, a 60-year old client who lives in Ontario, gets in a car accident and is in a coma. You recently took Judith as a client and, unfortunately, haven’t yet discussed her estate plans. She has significant wealth, a condo and a vacation home in Arizona.
When you contact her lawyer, you find out her PoA documents and will are outdated. She named her only son as executor and attorney for property several years ago (following the death of her husband), but that son recently moved to the U.S. Plus, Judith’s lawyer hasn’t yet received the son’s new contact details, or any new instructions. Judith also has one brother (her attorney for personal care) who lives in B.C. and is on vacation for two weeks, with no access to phone or email.
The solution: Here are the steps Beaty Beaubier, a tax and estate lawyer at Stevenson Hood Thornton Beaubier LLP says you should take to protect Judith’s property.
Since you can’t find her son right away, consider freezing Judith’s accounts until you reach a solution. But you should still contact her banking representative.
When you find the son, educate him about how his U.S. residency could impact his mother’s portfolio if he remains attorney for property. Since Judith has a significant portfolio of Canadian assets, the son also has to check whether her brokerage is licensed in the state where he resides, which will allow him to give instructions as a non-resident.
If the son doesn’t want the appointment, he could apply through the court to have a new attorney named for property, such as his uncle who lives in B.C.
Remind the son that he could continue as attorney for property over any U.S. properties or assets, such as the vacation home. This could only happen if the new PoA complies with the legal formalities of the particular state the son resides in, as well as the state the property is located in.
Since the attorney for personal care is absent, an advisor might contact the OPGT. But [doing so] should be a last resort, says John Johnson, a wills and estate-planning lawyer at Nelligan O’Brien Payne LLP. Instead, Johnson suggests asking executors or property attorneys for missing contact info.
Once you contact Judith’s brother, he can take over decision-making, or go through the court system to request new personal care arrangements if he no longer wants to be involved. Johnson suggests that might be best, since Judith may now need full-time care and the brother lives far away.
Originally published in Advisor's Edge Report
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