In Part 1 of the series, we looked at how to handle rental income from U.S. property as a Canadian. In Part 2 of the series, we covered the issues from selling a property and certain tax considerations.
In the final part of our series, we turn to an equally important topic – estate planning for U.S. property. Owning foreign real estate adds an extra layer of complexity when it comes to your will, powers of attorney, and potential U.S. estate taxes. Even if your estate is modest by Canadian standards, U.S. tax and legal rules can create surprises for your beneficiaries if not properly addressed.
The U.S. has its own estate and gift tax system, and their rules may not always line up with Canada. By engaging with a cross border tax and estate specialist, you can develop a plan to make life easier for your family.
U.S. Gift and Estate Tax
Canadians who own U.S. real estate may be exposed to U.S. estate tax on death. The tax applies to the fair market value of “U.S. situs assets” (ie. U.S. property), not just the gain or profit.
Many Canadians choose to hold U.S. property as Joint Tenancy with Right of Survivorship (JTWROS), meaning the surviving owner automatically inherits the property when one owner passes away. While this can simplify transfer of title as it keeps things out of probate, it does not necessarily eliminate U.S. estate tax exposure. The tax treatment is usually dependent on who originally paid for the property. There is a possibility that the entire value is included in the estate of the first joint tenant to pass away unless there is proof that the survivor has made a contribution of their share to the property.
Sometimes people try to gift their U.S. property before death, by adding or transferring it to a spouse, child, or other family member. While that might seem like a smart way to make things easier, it could trigger a U.S. gift tax. For example, if you decided to add someone on title to your U.S. real estate, you would been considered to gifting half the value of the property, unless they have contributed funds to purchase half of the property. You would need to file a gift tax return and could even owe U.S. tax.
Wills and Power of Attorney
Many Canadians assume their Canadian Will and Power of Attorney will cover their U.S. assets, but that is not always the case. While the Canadian Will may be valid in the U.S., issues may arise due to differing succession laws between the two countries. This may make the probate process longer and more expensive.
To avoid complications, you should consider a separate U.S. Will governed by the state where your property is located to handle your U.S. real estate. It is important to make sure the U.S. will is drafted carefully so it does not contradict with your Canadian one and risk the potential of being revoked.
Special consideration should also be made for a Power of Attorney as it can be state-specific. A Canadian Power of Attorney may not be valid or accepted in the state where your property is located. Having a separate U.S. POA ensures that someone can mange your property or finances if you become incapacitated.
Planning Considerations
A few common strategies to consider to help reduce the burden of potential U.S. estate tax and administration of an estate:
1. Own the property jointly with a spouse or family member ensuring that the tile reflects each person’s true contribution to avoid a gift tax.
2. Use a non-recourse mortgage (secured loan) to limit the value of the U.S. property included in the estate, thereby reducing estate tax.
3. Consider holding the property through a Canadian partnership or trust, but seek legal advice as these structures can create another set of tax complexities.
4. Purchase life insurance to fund any future U.S. estate tax liability, often through a Canadian trust.
5. Seek legal advice to draft a U.S. Will and Power of Attorney to avoid complexity and simpler administration.
Owning U.S. property can enhance your lifestyle and diversify your investments, but it comes with layers of cross-border tax, legal and estate planning rules. The common theme across all three parts is to plan ahead and eliminate any surprises. With the right planning, you can enjoy the benefits of U.S. property ownership without leaving your family in a tangle of red tape and unexpected taxes.
We recommend clients seek legal and tax advice from a professional accountant and lawyer to review the financial obligations related to owning and selling US property.