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I’m a Canadian Considering Purchasing a California Vacation Home, What Form of Home Ownership Should I Use? Should I Use a Trust? Part I

Us, at Sanger & Manes, lecture on this topic regularly for Canadians in the Palm Springs area. We copy my lecture materials on the question of how the Canadian might consider owning the US home. First, let’s introduce a couple concepts worth considering before we choose the ownership form: the US estate tax and the dreaded California probate. Then we’ll get into evaluating various forms of home ownership.
What is the US Estate Tax? Can it Be Imposed on Canadians?

The US estate tax is a death tax imposed on Americans (on the value of all their assets worldwide) and possibly Canadians, but only if the Canadian owns US property at death (US property generally=US real estate or securities of US corporations). If so, the tax imposed is generally 30-40% of the value of the US property owned at death.

Does the current US/Canada Tax Treaty Offer Canadians Relief from the US Estate Tax?

YES (this very important). As per the US-Canada Tax Treaty, if the Canadian Snowbird does not own more than $5,340,000 in worldwide assets/dollars (an indexed amount, $5,340,000 is for 2014) then no matter the value of the US house, the Canadian Snowbird is not subject to the US estate tax!!! So most Canadian Snowbirds are not subject to the US estate tax- period!

California Probate- Avoid It !!!

What is California Probate?
Answer: 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.

What are the Ordinary Fees and How Much Are They?

There are ordinary fees (which are statutory). Every probate will include these fees. Ordinary fees cost approximately 3% to 4% of the property value in Cal. These are the minimum fees that will be required in every case.

What are Extraordinary Fees and How Much Are They?

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) involved. They will be charged by the attorneys normal hourly rates. Extraordinary fees are likely to be in the thousands of dollars in every US-Canada probate.

How long does California Probate Take?

Probably no less than a year in the international context .
Any other Negatives about Probate?

Yes, it makes your finances public record.

So I’m a Canadian with Big Bucks (well over $5.3 Million (measured in US dollars) in Worldwide Assets), and I want to buy a Nice La Quinta House, but I’ll be Darned if I’m Going to Pay the US any Estate Tax When I Die. how should I Own my New Swanky California Vacation House?

LIKLEY The BEST OPTION FOR CANADIAN SNOWBIRDS TO AVOID THE ESTATE TAX WITH RESPECT TO US HOUSE: OWN THE HOUSE VIA THE CANADIAN IRREVOCABLE TRUST

Pros: Many cross-practitioners believe when the Canadian Snowbird dies he or she does not own a US house for the purposes of the US estate tax (the Canadian Trust does). So $0 estate tax due upon death.

Pros to the Canadian Irrevocable Trust:

-As good as a Canadian corporation for estate tax protection, but no high corporate tax rate upon sale.

-Probably avoids US probate (but US counsel (e.g., Sanger & Manes) must review the Canadian Trust to ensure it contains the proper language to avoid us probate!!!).

Cons: Numerous:

-Little US estate tax concern if put into place prior to house purchase (but a large US gift/estate tax concern if trust put into place after original home purchase).

-It’s an irrevocable trust- no going back!

-Only H or W can be a connected to trust, the other is not. So if H&W get divorced (or if H or W dies) , the non-connected spouse must pay rent to use house.

-If trust is still in place after 21 years, the property must undergo a “deemed disposition” for Canadian tax purposes (i.e., the underlying property is deemed sold after 21 years, and any deemed gain is cap gain for Canadian tax purposes).

We can draft Canadian Irrevocable Trusts here at Sanger & Manes with the help of Canadian counsel. But really, the Canadian should probably only consider it only if he or she owns more than $5.3M in worldwide assets (plus a sizeable US asset like a house). It comes with several restrictions which the Canadian may regret later on.
More on the several other possible ownership structures in Part II…..