Unlike in Canada, in the United States, an individual is not deemed to have disposed of all of his or her property immediately before death. The US Federal government taxes its residents on the Fair Market Value (FMV) of all of their properties at the time of death.
Further, certain types of property situated in the United States but owned by non-residents are subject to taxes in the US. This includes real property (buildings, land, recreational vehicles and boats) and securities such as stocks.
HOW ESTATE TAX IS CALCULATED
In the US, a person’s inheritance is calculated at progressive tax rates which vary between 18% to 40%, depending on the value of the estate in question.
However, a tax credit allows a taxpayer to reduce or even eliminate estate tax:
Non-residents are entitled to a tax credit in the amount of $13,000, specifically on an inheritance of assets with a value of $60,000;
“Green Card” holders, US residents and citizens are entitled to a tax credit of up to $2,081,800 on an inheritance of assets with a taxable value of $5,250,000; and
Canadians (non-resident aliens) benefit from a tax credit of at least $13,000.
Therefore, Canadians with US assets exceeding $60,000 may be subject to the American estate tax.
Probate is a legal procedure in which a court determines the validity of a person’s will to assure that it was legally made and executed and to assure that the deceased’s assets are distributed to the right people.
In Florida, contrary to the practice here in Quebec, the estate of a deceased must pay probate fees ranging between 3% and 5% of the estate’s total value, and must hire a Florida probate attorney to represent them.
Until the probate process is complete, heirs to the estate cannot sell, rent or mortgage the deceased’s property.
A will that is notarized here in Quebec does not eliminate the need for probate. It is necessary to undertake probate procedures for the will to be recognized and executed in the United States.
COSTS AND TIME FRAME
Probate is a long and costly process:
Probate proceedings may take 6 to 18 months to complete;
Probate requires the hiring if an American attorney; and
Probate requires a payment of 3% to 5 % of the value of the estate.
Holding property by way of an entity that “cannot die” (such as our revocable trust) makes it possible to avoid the probate process altogether.
In Florida, “guardianship” is a legal procedure by which the property of a minor or an adult under disability (physical or mental) is administered and managed by another person who is able to undertake the responsibility.
No one may act in the name of another person without either the express authorization of that person or a court. This means that the spouse, parent or child of an individual may not act (for example sell, lease or mortgage a property) in an individual’s name without obtaining guardianship over the person’s property. This rule applies even if there is a valid mandate of incapacity made by a Quebec court.
COSTS ASSOCIATED WITH GUARDIANSHIP PROCEEDINGS
Guardianship proceedings cost upwards of $4,500 excluding legal fees (usually about $1,000).
Mandates of incapacity made in Quebec are not recognized by the legal authorities in Florida.
Holding property by way of revocable trust for cross-border purposes allows one to avoid guardianship proceedings. For more information on this option, please consult the cross-border trusts section below.
Canadians may avoid the costs of guardianship and probate by holding their real property located in Florida by way of a trans-border trust.
Revocable Trust for Cross-Broder Purposes (RTCB’S) are created by drafting a trust agreement, which allows the owner of the property to:
Hold and control (sell, lease or mortgage) his or her property;
Be the only person with the rights to the revenue or capital of the trust;
Avoid paying administration fees; and
Transfer his or her property to the trust tax free.
WHY USE A RTCB?
Allows the avoidance of guardianship proceedings in the event that the trustee loses his or her capacity to act. The replacement trustee (who will be named in the agreement) may manage the trust in the place of the original trustee;
Survive the death of the trustee-beneficiary. The replacement trustee acts as a liquidator which allows the latter to distribute the assets of the trust to the purchaser’s heirs (beneficiaries of the residue of the trust) without triggering the requirement for probate.
Whether the purchase of property is made independently or with others, the purchaser may take advantage of the benefits offered by the RTCB.
PROPERTY THAT HAS ALREADY BEEN PURCHASED
Property may be transferred to an RTCB at any time.
Upon transfer, the name of the trust will be inscribed on the title of the property in place of the original purchaser. Since the trust survives the death or incapacity of the purchaser, it allows for the avoidance of guardianship and probate proceedings.
It is recommended to set up an RTCB’s before purchasing property in Florida to avoid transfer fees.
MAINTAINING THE TRUST
From a financial perspective, RTCB’s are transparent. This means that a taxpayer is taxed personally on rental income and capital gains generated from the sale of property.
It is not necessary to file a separate tax return in the name of the trust.
There are costs for the initial setup of a RTCB but no additional annual maintenance.