Being an executor isn’t easy. That goes double for executors in charge of an estate with significant U.S. assets, or a fully U.S. domiciled estate. It’s complicated. And what executors don’t know about U.S. reporting regulations and tax laws can hurt them.
Different countries; different rules
Unlike Canada, the U.S. imposes an estate tax on worldwide estates worth more than $5.34 million (2014). The U.S. also has different probate rules, and the process itself is generally slower and more expensive than probate procedures in Canada. Until the court date is set, executors cannot do anything.
And, “If there’s tax payable to the IRS, it’s the estate that owes it—but if the executor fails to file, the executor’s on the hook,” says David Altro, managing partner at Altro Levy.
State law can add an additional layer of complexity. New York has its own estate tax, while Florida does not. However, Florida requires an executor to be either a Florida resident or a relative of the deceased (either by blood or by marriage). For these reasons, often the most effective solution is to shift assets out of the estate prior to death. Altro tells clients, “To avoid these issues, maybe you shouldn’t own the property in your name personally.”
He adds, “Maybe have it in a cross-border trust or a partnership, or a vehicle that doesn’t die.” The goal is to bring the value of the estate below the amount that will trigger federal and state estate tax, and to avoid probate.
Be aware of the special tax planning required when Canadian clients have U.S. resident children or, alternatively, when the clients are dual U.S.-Canadian citizens. If the estate is worth less than that threshold amount, the executor must file an affidavit stating so. In New Jersey, for instance, the form is called L-9.
Estates must report and pay tax within nine months of date of death. Failure to do so can result in hefty penalties.
Margaret O’Sullivan, principal of O’Sullivan Estate Law, says the U.S. doesn’t give executors much time to close the estate.
“The executor only has nine months to file a U.S. estate tax return, unless it’s extended,” she says. “And that [applies] not only when we have a Canadian executor of a deceased U.S. [citizen], but also where we have a Canadian passing away who owns U.S. situs assets.”
However, if a person dies early in the year, the executor technically can’t file a tax return until the following February at the earliest. That’s because she won’t have the necessary income statements from Social Security or investment companies.
And many estates with U.S. assets require court-supervised administration, “whereas here, you get probate, you go off and administer the will, and there’s really no time that the court unilaterally has oversight to require you to come back and account to it,” says O’Sullivan.
In the U.S., “It [can be] a lot more paperwork, a lot more expense—even if the assets are not worth that much.” For simpler estates, though, the time and cost can be minimal as long as the executor is organized and has good legal and tax counsel.
If the executor needs any extensions, the deceased’s lawyer holding the will can make the request on her behalf.
- Missing the deadline.
- Ignoring state-specific rules. In addition to federal tax rules, individual states have specific rules regarding the disposition of property. Executors need to be aware of both, or face penalties.
- Distributing assets without clearance. In some states, U.S.-domiciled assets require probate clearance and/or court approval before assets can be sold and distributions made to heirs. Technically, you’re not even supposed to have a yard sale until the will is probated and the executors named in the will are accepted by the court.
- Not seeking professional advice.
James Dolan is a Vancouver-based financial writer.