July 2012 Archives

July 29, 2012
Posted by Michael Brooks

I'm a Canadian Who Plans to Purchase California Real Estate Which I Can Rent Out, But I'm Worried About Possible Lawsuits. What is the Best Form of Home Ownership For This Purpose (Part 2)?

In my last post, I summarized that for Canadians looking to purchase California real estate which they could then rent out, but who were worried about potential lawsuits from their tenants (as they should be), utilizing the limited partnership form was probably the best method of ownership currently available. Let's take a closer look at to why...

Why Can't I Just Purchase My New California Rental Property as an Individual, as Joint Tenants or Tenants in Common?

Because owning property in an individual capacity provides you no liability protection. If your tenant gets hurt on your property, he or she can sue you personally for all you have in a California court. And keep in mind, it is quite possible that a Canadian court would enforce the judgment of a California court.

I've Heard So Much About LLC's, why Can't I use a California Limited Liability Company to Purchase My Rental Property?

It's a shame, because the LLC really would be a terrific structure for Canadians who wanted to purchase California real property which they would then rent out. The LLC offers the great combination of liability protection (which is critical in case of a law suit by your tenant), plus the LLC members may elect to be taxed a partners (and not corporate shareholders). This tax treatment is critical. Corporations pay corporate taxes (at a rate of 35%) on income earned by the corporation, and then when the shareholders receive a distribution (a dividend), the shareholder must pay a dividend tax (i.e., shareholders of a corporation can effectively pay a second tax on the same income). Not good. Partners, however, are taxed just like individuals. The partnership is disregarded, and there is only one tax on the partner. And by the way, on rental income that should be a very low amount of tax, if any, because the partnership can take significant deductions on the rental property.

But the problem is we understand that LLC's are not currently treated as partnerships for tax purposes in Canada. It's our understanding from our Canadian colleagues that this may change in the future. For now, the Canadian owners of an LLC electing to be taxed as a partnership (of course you would make this election) will not receive a credit on the US income as a partner (from renting or selling the property) in Canada. Canada would give the Canadian LLC member a dividend credit (presumably) as if the LLC were a corporation, but the Canadian LLC member with rental property in the US doesn't have a dividend. They were taxed as partners (individuals) in the US. So this means the LLC owner could end up paying tax TWICE on the same income: once in the US (as a partner of a deemed partnership) and once in Canada (as shareholder of a deemed corporation). This is a result that any Canadian investing in US real estate cannot let happen: double tax. Until further notice from the CRA, US LLC's are off the table for Canadians.

I Already Have a Canadian Corporation, Why Don't I Just Buy My California Rental Property With That?

First of all, you would get the limited liability you seek with your Canadian corporation only if you register it to do business in California. That will cost a minimum of $800 to the state of California each year (the same as if you were forming a California corporation). If you fail to do that, and your tenant has an accident and sues the owner of the property (the Canadian corporation), the California courts will treat the corporation's shareholder as individual owners (i.e., the California courts will not respect the liability protection of a foreign corporation which does not register to do business in California). That's the price of liability protection in California- a minimum of $800 a year.

But standard (C) corporations (whether US or Canadian) owning US rental properties are probably a bad idea anyway. If your corporation buys a rental property in the US today for $150,000, and then the corporation sells it five years later for $350,000 (we'll think optimistically), the corporation owes a tax to the US of $200,000 (the appreciation) x 35%(today's corporate tax rate)= $70,000. That's too much. If you owned the property as a partnership, under same scenario the partners would owe a tax to the US of $200,000 x 15% (today's individual capital gains rate)=$30,000. That's less than half-quite a difference.

Finally, note both for purposes of the CRA and the IRS, generally if the corporation's shareholders don't pay rent to the corporation to use the property personally in the US (if they ever do), that's taxable income in both Canada and the US on the "imputed" value of the fair market rent. You don't own the property, your corporation does. Got to pay rent if you go use the property.

For now, I think limited partnerships are the preferred entity for those renting out the California property. More detail on those soon, in Part 3 of this series.

July 23, 2012
Posted by Michael Brooks

Dual US (and Foreign Country) Citizens Who Don't Owe Tax in The US, It's Easy to Get Compliant with IRS Now. For the Other US Citizens With Foreign Accounts and Who do Owe US Tax, You Need to Consider the 2012 FBAR Amnesty Program

IR-2012-65 allows Dual Citizens who Don't Owe Tax in the US a Pain-Free Way to Become Compliant

First of all, which dual citizens don't owe tax in the US? As a general matter, a dual citizen who have been living in a foreign country and been paying that country's tax (as appropriate) probably does not owe much tax in the US (if any). The US taxes its citizen's income no matter where they earn it anywhere in the world. But the US also works in cooperation with almost every country in the world (except for countries such as Cuba, Iran and Yemen...i.e., countries we have no relations with). If you are an American citizen living in France (you might also be a French citizen), and you have been paying your appropriate French tax for the money you earn in France, odds are you will not owe tax in the US. Why is this so? Most foreign countries have higher tax rates than the US. So as long as the income is of a type which we recognize (such as wages for services, or gains for stock sales, or rental income, or dividends, etc), the US will credit income earned in France by the dual French/US citizen. Thus, after the credit, the US citizen probably owes $0 US tax or very little US tax, on the amounts he earns in France. And the same goes for that US citizens with most every other country.

Now let's not confuse the issue of whether the dual citizen owes any US tax with the obligation of the dual citizen to: (a) file US tax returns; and (b) file FBARs annually if they have bank accounts outside the US with over $10,000 at any point in the calendar year. Those obligations generally exist whether the person owes US tax or not. But for those people the new guidance is terrific. Those individuals must complet their past-due tax returns (at least 3 years) and delinquent FBARs (at least 6 years), and they'll probably have no penalty to get compliant provided you don't owe significant US Tax. A great deal.

Now if you haven't been paying the appropriate tax in France (or whatever foreign country), and you probably haven't been paying the appropriate tax in the US if you haven't been completing your tax returns here, then (provided you have bank accounts in the foreign country over $10,000) you need to go through the 2012 FBAR amnesty program (review our prior posts for a description of the OVDP).

Let's point out some important factors of the new amnesty program.

More Notes about the 2012 FBAR Amnesty Program

The 2012 FBAR amnesty program is currently underway. There is no deadline for the program. The program could be pulled by the IRS at any time, or the IRS could raise the current amnesty FBAR penalty (27.5% of the highest (aggregate) overseas balance in the highest year with a bank account abroad) at any time. Again, for those going through the amnesty program, you really have strongly consider taking the 27.5% penalty if you did not check the box on the Schedule B of the Form 1040 (asking the taxpayer to check the box if he or she had any foreign bank accounts). For those who don't go into the amnesty and eventually get caught, the penalties can be enormous. They can wipe you out, no question. Also, in really egregious circumstances, jail is a possibility. And, as we understand it, foreign countries (like Switzerland) are feeling little option but to turn over bank account records to the US government (either presently, or soon).

The IRS clearly draws a distinction between those taxpayers who come in voluntarily, and those who are caught. If you are a US citizen or resident and have overseas bank accounts and you owe tax in the US on those amounts (maybe because you haven't paid the appropriate tax in the foreign country at issue), you probably should consider the 2012 amnesty program soon.

July 17, 2012
Posted by Michael Brooks

I'm a Canadian Who Plans to Rent My Palm Springs Area Home and I'm Worried About Possible Lawsuits, What is the Best Form of Home Ownership For This Purpose?

Many Canadian snowbirds who purchase Palm Springs area property wish to rent out the property during the time when they can't use it personally (or maybe rent it out all the time). I think it's a great idea, primarily because if the snowbird plays his or her cards right, they can receive rental income and possibly owe $0 tax on the income in the United States- a great deal. But if you're going to let strangers use your property as business guests, in these days of excess lawsuits, you have to protect yourself. Insurance is a must, but insurance will only protect you to a certain point. It is possible a court could award a settlement of a far higher amount than the value of your US house or your insurance. Next, the injured renter wants every penny you have to compensate for the injury. Finally, I am asked from time to time whether a judgment from a California court could ever be enforceable in Canada? The answer is it is possible for a judgment from a California court to be enforceable in Canada. So Canadians, like Americans, need to be careful about how they conduct their US businesses, just like they need to careful about how they conduct their Canadian businesses.

So Let's Review Our Various Ownership Forms From a Liability Protection Perspective

Ownership as an Individual, as Joint Tenants or Tenants in Common- If you are going to rent out your property to strangers regularly, none of these basic forms of homeownership is likely a wise idea. In each case, the owner can be sued in his or her personal capacity (it's either one or multiple individuals who own the property), and that means (in a worst case scenario) you could lose all your personal assets.

Ownership as a Partnership- Ownership via a regular partnership is no different from a liability protection perspective as ownership as an individual or joint tenant,etc. The court's view it as multiple individuals who own a property.

Ownership as a Limited Partnership- Ok, now we're getting somewhere. Limited partnerships offer limited liability to each partner other than the general partner (and there must be a general partner). Limited liability means in a worst case scenario the limited partner can lose his or her interest in the limited partnership (ie. the value of his or her portion of the house), but that's it. NO PERSONAL LIABLITY. On the other hand, there has to be a general partner. Being the general partner doesn't help you at all from a liability protection perspective, so what we see quite a bit is the partnership naming a corporation (which itself has limited liability) to serve as the 1% general partner, while the individuals serve as the 99% owning limited partners. Now nobody's losing any personal assets in a lawsuit. A couple things to note on limited partnerships: (1) the limited partnership will have to file with the State of California and pay a minimum fee (it's actually called a tax) of $800 per year to the state. That's price of limited liability. And (2) if your limited partnership is a Canadian limited partnership, it must register to do business in the state of California and pay a minimum fee of $800 per year- again, that's the price of limited liability.

US Limited Liability Corporation (LLC)- I would love to recommend to all Canadians to own their California house via a LLC if they planned to rent it out. It offers the fantastic mix of allowing the owners to be taxed as a partners of a partnership and not a corporation (being taxed as a partnership is generally far preferable than being taxed as a corporation), and still offers the liability protection for a regular corporation. Alas, I can't recommend it, because (at least presently) Canada does not recognize LLC's as taxed as partnerships. So a Canadian using a LLC risks a double tax on the same income (once in the US as a partnership and once in Canada as a corporation), or at least a timing mismatch in the tax credits. Until Canada recognizes LLC's as partnerships for tax purposes, Canadians should stay away from the LLC.

US S Corporation (small corporation with special tax rules)- Canadians can't use these, as the US S corp. rules do not allow for foreign shareholders.

Regular ("C") Corporation- Canadians can use an American or Canadian corporation to own their US house, again provided they pay the state of California a minimum of $800 a year for liability protection. And they work great for liability protection. But the tax implications of a corporation are probably the least favorable of all choices (to be discussed at a later post).

Trusts- I love trusts for avoiding probate, but most trusts don't have special liability protection. There are special trusts which do serve this purpose, but the rules about these trusts are restrictive.

Conclusion

As of now, for Canadian owners whose primary concern is liability protection from the rental of their Palm Springs area home, I favor limited partnerships. They give the best mix of liability protection with good tax benefits (to be discussed at a later post). When Canada recognizes the US LLC as taxed as a partnership, the LLC would likely become the favored way for Canadians to own US real property for liability protection purposes.

July 16, 2012
Posted by Michael Brooks

US Citizens and Residents of the Coachella Valley, Have You Failed to Report Your Foreign Bank Accounts? IRS Offers a 2012 Amnesty Program (and Now has Released Detailed Information About the 2012 Amnesty Program), But its Tricky (Part III)

So a few months ago on this blog we informed you that the IRS offered a new FBAR amnesty program (now the 3rd program it's offered), but that it only had released the broad stokes of the program (see our entry from February 16, 2012, for our last discussion of this topic). Since then, the IRS has established new procedures for dual citizens who have foreign bank accounts but who have paying the appropriate tax on the amounts in the those accounts in the foreign country at issue. Taxpayers with this situation can resolve it rather easily without having to go through a formal amnesty program (see our post from July 5, 2012, discussing this new option). However, that program won't be available for everyone, and for the rest there is now the 2012 Overseas Voluntary Disclosure Program (the "OVDP"). On June 26, 2012, the IRS issued a set of Frequently Asked Questions and Answers (this is new guidance to assist taxpayers under the 2012 OVDP).

Background

Again, recall US tax citizens or residents must file a "FBAR" (a "Report of Foreign Bank and Financial Accounts") annually, provided the US citizen or tax resident has over $10,000 in financial account(s) which are not located in the United States. The term financial account includes any savings, demand, checking, deposit, or other account maintained with a financial institution in addition to certain annuity and life insurance contracts, commodities and precious metals and safe deposit accounts. The FBAR is filed on a US Treasury Form TD F 90-22.1, by June 30 of the year after the US citizen or resident had a non-US account.


So What Are Broad Strokes of the 2012 OVDP?

Largely, we've already discussed basics of the 2012 OVDP in our prior posts, since the amnesty program remains very similar to the 2011 amnesty program. Taxpayers going through program will have to make a very important decision.

Option One- No Questions Asked. The taxpayer chooses pay a one-time penalty of 27.5% of the highest aggregate overseas account(s) balance in the highest year. So if the aggregate overseas account balance in the highest year (of all the years when the individual did not file a FBAR) was $2,000,000 (and by the way, when we say highest aggregate overseas account balance we are including the value of overseas assets- such as a house- plus the value of overseas accounts), the taxpayer is volunteering to pay a penalty to the IRS of $550,000 (27.5% x $2,000,000), plus the unpaid income tax (if any), plus penalties for failure to file or pay income tax (if any). That stings, no question.

Option Two- Roll the Dice for a Lesser Penalty. The taxpayer asks for a lower penalty than the 27.5% general amnesty penalty (which required a payment of at least $550,000 for a $2,000,000 overseas aggregate account balance above). But this is a gamble with big stakes. If the IRS agrees that the taxpayer is entitled to a lesser penalty based on the facts of the case, then great. But if the IRS doesn't agree, the taxpayer can lose big. In fact, if upon review the IRS believes that the taxpayer's failure to file a FBAR was "willful", they can take EVERYTHING in the foreign accounts (maybe more). The taxpayer cannot elect option two and roll the dice if the facts of his case have even the whiff of a willful failure not to file FBARs. So what factors suggest to the IRS a taxpayer willfully failed to file a FBAR???

How Do I Know if the IRS will Consider My Failure to File FBARS a Willful Failure, so That I Better Take the 27.5% No Questions Asked Penalty?

So this is really where the rubber meets the road on the 2012 OVDP FBAR amnesty. I need to know whether my case is too risky to ask for the opt-out, and just accept the 27.5% one-time penalty. I must accept the 27.5% penalty if there is a decent chance the IRS will deem my failure to file FBARs as willful. What is a willful failure to file? While there are no concrete answers to this, here are some factors (which come both from the 2012 OVDP Q&A guidance and from our own discussions with the IRS):

1) If the taxpayer has large, unreported taxable gains attributable to the overseas account(s), this is a negative factor (e.g., you got a Swiss account which you haven't filed a FBAR for and you trade stocks in the account and had some major gains and a lot of tax due in the US from these gains...you should probably take the 27.5% amnesty deal...see Q&A 51.2 of the new ODVP guidance).

2) You failed to check the box on Part III of the Schedule B of the Form 1040 that states you had foreign bank accounts. It's one thing not to file FBAR's annually, but it's another thing to fail to state on your personal income tax return that you had any foreign bank accounts. That is not a good factor for someone looking for the opt-out deal.

3) You failed to pay the appropriate tax in the foreign country at issue. It looks better if while failing to file FBARs and paying tax in the US, you were at least tax compliant in the foreign country at issue. Note that if you paid the correct tax overseas, it's quite possible (due to the tax credit system) that you have $0 US tax owed. If you paid the correct tax to the foreign country at issue, that's a very positive factor.

Make a Calm, Objective Decision on Whether to "Opt-Out"

In our experience, there is natural inclination for clients not to want to accept the 27.5% (of the highest aggregate foreign account balance(s) in the highest year) penalty. This is understandable. But again, you need to calmly and objectively assess your case before you make the critical decision of whether to opt-out of the no questions asked 27.5% penalty. The stakes are huge (you could lose the entire value of these accounts if you're wrong). If you haven't declared your overseas bank accounts yet, and you are increasingly worried about the IRS and the Department of Justice discovering them, we strongly recommend you give us or a competent tax attorney a call to review your case.

We'll talk about how long the new FBAR 2012 Amnesty Program is expected to last, and other features of the program, in our next post.

July 10, 2012
Posted by Michael Brooks

Vancouver Couple Purchasing Indian Wells Real Estate, What is the Best Form of Home Ownership to Avoid Costly California Probate Fees, Part 2

So we're continuing our discussion of why, for the sole purpose of avoiding or minimizing the probate costs of the Canadian snowbird, a trust is likely the best way to own your Palm Springs area home. Remember, probate is the legal process your estate goes through when you die. For the Canadian snowbird who passes away from Vancouver with a vacation house in Indian Wells, there is probably already a probate which must occur back in British Columbia. If at all possible, why make it two? It's expensive, it can be difficult due to the international component, and can be time consuming (maybe even takes over a year). And by the way, the same analysis holds true for somebody whose permanent residence is in Japan or Germany, or even for somebody whose permanent residence is in Michigan. So if you're not living permanently in California, you probably would rather avoid a second costly probate (which would occur in California). We will call the second probate in California (the one we'd like to avoid if possible), the "ancillary probate". Review our last post for an overview of the costs of the California probate process.

Let's Revisit our Various Forms of Property Ownership, and Review Whether, Upon the Death of a Canadian Snowbird Owner, a California Ancillary Probate is Required.

Property Owned by Individual- If Larry from Vancouver owns, in his name alone, a house in Indian Wells, upon his death a California probate is required to determine who inherits Larry's Indian Wells house (i.e., so while the rest of Larry's estate is likely going through the primary probate in process back in BC, the estate has no choice but to also pay for the expensive costs of an ancillary probate in California). As a side note, the California court would likely admit Larry's Canadian will to determine who to distribute the Indian Wells house to.

Property Owned by a Couple as Tenants in Common- If Larry and his wife Helen, both from Vancouver, owned their Indian Wells house as tenants in common, upon the first to die of either Larry or Helen, the property must go through a California probate to determine who inherits Larry or Helen's interest in their Indian Wells home (probably the survivor of the two). Talk about needless. Only one of the two owners passed away and we still have to go through an expensive California ancillary probate!

Property Owned by a Couple as Joint Tenants- Joint tenants are considered "co-owners" of the entire property. So as joint tenants, if Larry or Helen dies, then the survivor automatically takes over the entire property without probate required. When the second of the Larry or Helen dies, then a probate will be required to determine who inherits their Indian Wells home.

Property Owned by a Partnership or a Corporation (including an LLC)-
Provided all the partners or shareholders of the partnership or corporation, respectively, are domiciled (where they permanently reside) outside of California, upon the death of Larry or Helen, as a partner or shareholder (of the partnership or corporation which owns the Indian Wells house), a California probate should not be required. This should convert the real estate into an intangible asset that will be subject to probate in Larry/ Helen's home jurisdiction (British Columbia) but not in the jurisdiction where the property is located (California). This, of course, will not eliminate probate altogether, just the ancillary probate in California. So while ownership thorough a partnership or corporation does not likely require a second probate (in California), it likely increases fees required for the primary probate (in this case back in Vancouver). It will also add significantly to the time to transfer the California property to the new owner (it can't occur until the Canada probate is concluded).

Property Owned by a Revocable Living Trust- Larry and Helen can title their Indian Wells house into the name of their revocable living trust. That way, the house can either be transferred directly to the beneficiaries Larry and Helen have named in their revocable living trust to receive their assets after they die, or sold by the successor Trustee they have named to manage and distribute the trust property after they die. We view this ownership as the best method to avoid California probate costs.

Why is a Revocable Living Trust Likely the Best Method to Avoid Probate Costs?

The basic reason is that the Indian Wells house will not have to go through an expensive California probate when one, or both, of the owners dies. This happens when the house is owned individually, or as tenants in common (upon the first of the couple to pass away), or as joints tenants (upon the second of the couple to die). In addition, while owning the house through a partnership or a corporation will probably not require a second California probate, the value of the partnership interests or corporation shares will likely be added to the value of decedent(s)' assets in the primary probate (back in Vancouver in our example). Assuming British Columbia probate costs are also based on the value of the assets being probated, then the primary probate becomes that much more expensive. Also, this will add significant delays to the transfer of the Indian Wells property. So a trust is likely the best way to avoid costly probate fees on the value of the Indian Wells house altogether, in addition to being the most efficient way to affect the transfer to those who inherit the Indian Wells house (probably the kids).

One final note on Canadians using US revocable trusts- it is our understating that in Canada, when one contributes a property to a US trust, the contributor must pay tax on the gain in the value the house (if any) at the time of contribution. So Canadians may be wary of contributing a significantly appreciated property to a US trust due to the Canadian tax implications. We will talk about this more down the road.

July 5, 2012
Posted by Michael Brooks

IRS Makes It Dramatically Easier (and less costly) For US Citizens Living In Another Country to Catch up on Past-Due Tax Returns and FBARs

On June 26, 2012, the IRS announced a new initiative to help US citizens living in another country (very likely dual citizens) catch up with their unfiled US tax returns and FBARs.

Background

In our law office in Palm Springs, we regularly see clients who may be Americans by birth, but who live in (and are also probably a citizen of) another country (usually Canada). While the dual American/Canadian may enjoy visiting Indian Wells three months a year, she really lives in Vancouver. But since she was born in Seattle, she has a social security number, she is a US citizen, and (whether she wants one or not) she has an obligation to file a US tax return every year (even though maybe she's never filed one in her life). Plus, since she has bank accounts outside the US in Canada with more than $10,000 in them, she has an annual FBAR filing requirement as well.

Before the Recent Announcement, This Was a Big Problem for the Dual Citizen Living Abroad

Dual citizens living (permanently) in a country other than the US did not know what to do. Was our Seattle-born dual US/Canadian citizen living permanently in Vancouver supposed to file 25 years of back taxes? Wouldn't that lead to possibly thousands of dollars in back taxes and interest and penalties to the IRS? And as for the delinquent FBARs, isn't the failure to file penalty for an FBAR $10,000 per each year going as far back as the FBAR program has been in existence (it started in 2003)? Our Vancouver resident might think it would be nice to get straight with the IRS because she doesn't like the specter of unpaid income tax and past due FBARs hanging over her head, but it's certainly not worth the $300,000 in back taxes and interest and FBAR penalties she will have to pay for coming clean.

IRS New Procedure Offers Significant Relief For Dual Citizens Living in a Foreign Country Who Have Not Filed US Tax Returns or FBARs in Years

Under the new procedure, taxpayers will be required to file delinquent tax returns for the past three years and file delinquent FBARs for the past six years. All submissions will be reviewed, but for those taxpayers presenting low compliance risk, the review will be expedited and the IRS will not assert penalties or pursue follow-up actions. How do we know if a taxpayer has a "low risk" case where there may be no penalties imposed? Absent unique factors, if the submitted returns show less than $1,500 in tax due in each of the reviewed years, they will be treated as low risk.

So the Dual Citizen Who Hasn't Done a US Tax Return in 20 Years Can Do the 3 Most Recent Tax Returns, and 6 Most Recent Past Due FBARs, and Maybe Have No Penalties and Now Have a Clean IRS History?

The answer is yes! And it's easier than you might think. If our Vancouver resident, born in Seattle (and with a vacation home in Indian Wells) has been paying proper taxes in Canada all these years, due to the tax cooperation between the US and Canada (and the tax credit system), she very possibly owes $0 in past due US taxes for the reviewed years (easily below the $1,500 per year threshold). And the same goes if she was born in New York City and now lives in France (or almost any other country). No failure to file income tax return penalty, and no $10,000 per year failure to file FBAR penalty!!! This is great news for the dual citizen living abroad who just wants to clean their US tax record.

See IR-2012-64 for more details, or call our office.

July 3, 2012
Posted by Michael Brooks

Canadians Purchasing Palm Springs Area Real Estate- What is the Best Ownership Form to Avoid Costly California Probate Fees?

We're going to start a new series on our Canadian blog, aimed specifically at those Canadians purchasing Coachella Valley real estate, and the best way to own their new Palm Springs areas home (i.e., how to take title). The first issue we're going to discuss is how to best to take title to avoid (or minimize) the expensive cost of California probate. Keep in mind as we discuss the issue of probate, the analysis is the same whether we're talking about somebody from Canada, or France, or Brazil, or even Washington or Oregon (i.e., people who own a home in California, but who live either in another state in the US or in another country outside the US).

Let's First Identify the Common Methods of Real Property Ownership

Owning as an Individual- self explanatory.

Owning as Joint Tenants- Each party of a couple (or more) is a co-owner. When one dies, the property automatically goes to the survivor(s).

Owning as Tenants in Common- Each party of a couple (or more) is an owner of part of the property. When one dies, that portion of the property goes to whomever the deceased tenant in common leaves it to.

Owning via a Partnership- The individuals form a partnership (could be a US partnership or a Canadian partnership), which owns the property.

Owning via a Corporation- The individuals form a corporation (could be a US corporation (including the US LLC) or a Canadian corporation), which owns the property.

Owning via a Trust- The individuals form a trust (could be a US trust (typically a US recovable trust) or a Canadian trust), which owns the property.

What is Probate?

Probate is the legal process (a court proceeding) an estate goes through when one dies. In the US, probate occurs on a state by state basis. So if you are from Canada or Oregon, and you own an Indian Wells house and pass away, as a general matter your estate must go through a California probate. So even all your other assets in the world are in Calgary (where your estate would undoubtedly have its own probate for all your other assets), if you own California real estate your estate will have to go through a California probate. That is, unless you plan ahead to avoid California probate!

What are Normal Probate Fees?

As a general matter, probate fees will be around 2% of the value of the estate being probated (it's a sliding scale: 3% at the lower levels down to 1% the higher the value of the property). So if we're only talking about a second house owned in California, we're talking about one major asset in probate: the house. However, the 2% (avg) are the "ordinary fees", assuming no major complications. That may be a fair assumption when we're speaking of someone from another US state, but when we're speaking of a Canadian or someone from another country outside the US, probate fees may rise significantly well above the ordinary 2% fees. And remember, these are only the attorney's fees we're speaking of to this point. There will be separate fees for those going through probate as well (e.g., property appraisal fees, court filing fees, possibly an executor fee). And again, when dealing with property owners who are citizens of foreign countries, the attorney's fees can jump well above the normal 2%. For Canadians, avoiding (or minimizing) probate with respect to their US real estate should be a high priority.

So What is the Best Form of Ownership to Avoid Costly Probate Fees?

The answer is the US trust (typically the US revocable trust). We'll discuss why, and compare the US trust to the other forms of common property ownership with respect to probate costs, in our next post.