Winnipeg Free Press - PRINT EDITION

American beneficiaries require special estate plan

  • Print

If you have children or other people living in the United States who might be beneficiaries of your estate, read on. I meet more and more Canadians who are in this position, whose children have moved to America and may inherit a large amount of money someday.

We will also review the rules on Canadian testamentary trusts, and the possibility of tax changes over the next few years.

Please keep in mind this column is not providing legal or tax advice, and you need to get any such advice from your own professional advisers.

So, back to the basics of estate planning -- you need to have a will. In that will, you can leave your estate outright to people. This means the "residue" of your estate (after paying off debts, taxes and other costs) is transferred by your executor to the people to whom you leave your property. These are your beneficiaries, or your heirs.

An alternative is to leave some, or all, of that residue to people "in trust." All wills actually contemplate this, by having a clause saying if the beneficiary is under 18, that person's inheritance will be held on their behalf by a trustee, until a certain age specified in the same will.

Such a trust described in a will is called a "testamentary trust." (Recall that the will is actually your "last will and testament.") These trusts can be very flexible, giving the trustee(s) full discretion to distribute the income and capital, or even to dissolve the trust, if they wish.

Or they can be restrictive, designed to protect the capital, as they might be in the case of a beneficiary who was incompetent (from a legal standpoint), young, inexperienced, subject to influences, had a problem with substance abuse, gambling or creditors, or had a shaky marriage.

There are several reasons to leave inheritances in trust, as my father did for me, rather than outright. The protections from creditors, marriage breakup or beneficiaries' own impulses might not be a problem now, but could become issues in the future. The trust arrangement provides a measure of protection, depending on how it is written up in the will, which protection can be utilized if and when needed.

Tax advantage is another reason to use such trusts. The testamentary trust is a separate taxpayer from the beneficiary, and the trust has benefit of the graduated tax rates. That means investment income earned in the future on the inheritance may be taxed at lower tax rates than investment income earned by the beneficiary directly, because investment income earned directly by the beneficiary is taxed on top of the beneficiary's regular salary or other income.

Spoiler alert -- as we mentioned last week, the March 2013 federal budget gave notice the government is going to "consult" with interested groups on whether to continue this decades-long tradition of graduated tax rates for testamentary trusts. So, it is possible that a few years from now the tax benefits will be decreased or removed, leaving only the protection and management reasons to maintain the trusts.

In the case of U.S. beneficiaries, the situation is different. First, leaving an inheritance in a Canadian trust for the benefit of a U.S. resident or citizen beneficiary causes the IRS to consider them beneficiary of a foreign tax entity, putting them in the same category as folks with offshore accounts designed to evade taxes. The investment income has to be claimed, even if not received, which is one of several negatives.

The solution for some people is to have a U.S. attorney set up a U.S. inheritance trust. This has several of the benefits listed for Canadian trusts, though not the current tax advantage. However, these also act as generation-skipping trusts and can avoid U.S. estate taxes for the beneficiaries on their subsequent passing.

U.S. estate taxes are less worry than last year, with a new large exemption, but the exemption levels have been changed so many times in the past five years such planning is probably wise, in the case of large estates.

When a U.S. trust is set up, the Canadian will is then changed to specify payment to that trust, for the benefit of the U.S. beneficiary, on their share.

 

David Christianson, BA, CFP, R.F.P., TEP, is a financial planner, adviser and vice-president with National Bank Financial Wealth Management, and author of the book Managing the Bull, A No-Nonsense Guide to Personal Finance.

 

Republished from the Winnipeg Free Press print edition April 12, 2013 B15

Fact Check

Fact Check

Have you found an error, or know of something we’ve missed in one of our stories?
Please use the form below and let us know.

* Required
  • Please post the headline of the story or the title of the video with the error.

  • Please post exactly what was wrong with the story.

  • Please indicate your source for the correct information.

  • Yes

    No

  • This will only be used to contact you if we have a question about your submission, it will not be used to identify you or be published.

  • Cancel

Having problems with the form?

Contact Us Directly
  • Print

You can comment on most stories on winnipegfreepress.com. You can also agree or disagree with other comments. All you need to do is be a Winnipeg Free Press print or e-edition subscriber to join the conversation and give your feedback.

You can comment on most stories on winnipegfreepress.com. You can also agree or disagree with other comments. All you need to do is be a Winnipeg Free Press print or e-edition subscriber to join the conversation and give your feedback.

Have Your Say

New to commenting? Check out our Frequently Asked Questions.

Have Your Say

Comments are open to Winnipeg Free Press print or e-edition subscribers only. why?

Have Your Say

Comments are open to Winnipeg Free Press Subscribers only. why?

The Winnipeg Free Press does not necessarily endorse any of the views posted. By submitting your comment, you agree to our Terms and Conditions. These terms were revised effective April 16, 2010.

letters

Make text: Larger | Smaller

LATEST VIDEO

Fire destroys one St. Norbert home, damages another

View more like this

Photo Store Gallery

  • Marc Gallant / Winnipeg Free Press.  Local- (Standup Photo). Watcher in the woods. A young deer peers from the forest while eating leaves by Cricket Drive in Assiniboine Park. A group of eight deer were seen in the park. 060508.
  • Marc Gallant/Winnipeg Free Press. Gardening Column- Assiniboine Park English Garden. July 19, 2002.

View More Gallery Photos

Poll

Should Canada send heavy military equipment to Ukraine?

View Results

View Related Story

Ads by Google