Grandma still has time to get run over by a reindeer.

Could it be? An early Christmas present from President Obama and the U.S. Congress? Well, if the Democrats in the U.S. House get their way over the next few days, that present will be a little smaller.

So what am I talking about?

As many advisors are aware, based on U.S. laws passed in June of 2001, U.S. estate tax was repealed in 2010 and was expected to return at the beginning of the New Year with an exemption amount of $1 million and a maximum estate tax rate of 55%. If you recall, the rate in 2009 – prior to repeal this year – was 45% and an exemption amount of $3.5 million.

However, as part of the President’s efforts to resolve the uncertainty around increasing U.S. income and estate tax rates and laws at the beginning of the year, President Obama struck a deal with the Republicans which included provisions for the return of the U.S. estate tax at a maximum rate of 35% and a per individual exemption of $5 million.

Although Senators Jon Kyl (Republican from AZ) and Blanche Lincoln (Democrat from AR) had previously introduced the same exemption and rate as the President is proposing earlier in the year, they were defeated and no one (I mean NO ONE) expected these to be reintroduced as part of the President’s bipartisan deal.

As of this writing, Senate Majority Leader Harry Reid has accepted the new proposed Estate rate and exemption. However, House Majority Leader Nancy Pelosi is holding firm and looking for the 2009 rate and exemption amounts of 45% and $3.5 million.

We should have greater clarity of how things will shake out in the next few days and very likely before the end of the year.

Despite the increased exemption and lower rate than most advisors expected, there are some other interesting provisions that will likely be part of the new law.

What has been proposed is that the new rate and exemption will only be available for 2011 and 2012. Unless Congress makes these laws permanent before the end of 2012, the estate tax rate would return to 55% with a $1 million exemption on January 1, 2013.

The new estate tax exemption would include provisions for indexing beginning in 2012 – even though we still have uncertainty beyond 2012.

The new law will likely include what is referred to as “portability” provisions. This would be an interesting addition within the new law as it would now automatically allow the surviving spouse the ability to utilize the deceased spouse’s unused estate tax exemption. This would diminish or reduce the need to establish specific trusts often referred to as “bypass”, “credit shelter” or “A/B” trusts as part of the estate plan.

Lastly, the new law would unite the estate, gift and generation-skipping taxes with the same maximum rate of 35% and have the $5 million exemption apply for all three taxes.

In terms of those of us who have clients who are either U.S. citizens resident in Canada or clients where one of the spouses is a U.S. citizen, this could significantly reduce the level of U.S. estate tax exposure and planning requirements that they would traditionally face.

Further, for those Canadians who would be contemplating the purchase of U.S. real estate for investment or personal use purposes, the more complicated planning playing field might be reduced somewhat given that U.S. estate tax exposure would only exist if the single Canadian decedent’s worldwide estate was greater than U$5 million or U$10 million for a married Canadian couple.

Stay tuned……

  • Terry Ritchie, CFP (U.S.), RFP (Canada), TEP, EA, a Calgary-based cross-border financial planner with expertise in both American and Canadian tax regimes, and co-author of The Canadian Snowbird in America, The Canadian in America, and The American in Canada