More on When We Use the Canadian Irrevocable Trust to Purchase US Property…
So we pick up where we left off last week: super-wealthy Canadians who own more than $5.34M in worldwide assets, and who loathe the idea of paying a US estate tax, should consider (1st and foremost) putting the US house into a Canadian Irrevocable Trust. You can do this with relative ease if the trust owns the house from the inception. But be careful for the scenario where the Canadians own the house individually at first, and then transfer (usually via a sale) the house to a Canadian Irrevocable Trust later. This is thought by some (but by no means all) practitioners to subject to the Canadians to the US gift tax (even though it’s a sale). I’ve yet to see any evidence of this, except for indirect case law from 50 plus years ago, so who knows. Nonetheless, Canadians transferring a US house to a Canadian Irrevocable Trust after owning it individually first (as opposed to when the trust buys the US property first) should remain mindful they are taking a risk, and that IRS may impose a gift tax on this transfer (sale). Call us at Sanger and Manes (760-320-7421) to discuss the Canadian Irrevocable Trust for California (and especially) Coachella Valley properties. This is a highly complex cross-border estate planning area, but Sanger & Manes can help.
For the vast majority of Canadians purchasing US real estate, the biggest concern is not the US estate tax, it’s the excessive cost and time required for a Canadian’s heirs to inherit their parents’ California real estate- i.e. the cost of probate (the California process whereby a California court orders the Canadian snowbird’s US house to be distributed to their designated beneficiary(ies)).
Remember, avoid California probate if at all possible!!!
Probate is the California process whereby a California court orders the Canadian snowbird’s US house to be distributed to their designated beneficiary(ies). Depending on how you own your California home, probate may be required after the death of one spouse, or the second spouse, or not required at after death of either spouse if a trust is utilized.
Probate is Expensive.
The estate of the Canadian Snowbird in probate will pay ordinary fees and likely extraordinary fees as well. Ordinary fees (which are statutory) are for the normal tasks of any probate. Every probate will include these fees. Ordinary fees cost approximately 3% to 4% of the property value in Cal (by statute), so a $500,000 house is looking at a minimum of around $16,000 in ordinary fees, plus other (potentially) significant costs and (extraordinary) fees (equaling possibly even up to $40,000 or even $50,000 total). Extraordinary fees are likely required in any international probate, because of the tax issues (and the requirement of the attorney to invoke various provisions of the US-Canada Tax Treaty). They will be charged by the attorneys at the attorneys’ normal hourly rates. Extraordinary fees are could be in the thousands of dollars in most US-Canada probates.
California Probate Takes Time
Probably no less than a year in the international context, and that time frame will likely grow longer as the years go on.
So What Vehicle Avoids The Significant Time Delay and Most of the Significant Costs of Probate? Answer: The US Revocable Trust (or a Canadian Revocable Trust hybrid)…–
preferably a revocable trust which has been drafted and reviewed by California attorneys (to ensure its acceptable to bypass probate). With no probate required under California law because the real estate is in an acceptable (under the laws of California) trust, all California real estate will likely be distributed at the end of the four month California statutory waiting period. And the cost difference (versus going through a whole probate)? Significant; a fraction of the probate cost….
We’ll get into the dos and dont’s of the California Revocable Trust (including the Canadian tax consequences for Canadians entering inot a California Revocable Trust) in Part III of this series….