So, we get this question a lot in our Palm Springs law office. There is no one-size-fits all on this issue. Here’s an overview of many of the most popular methods for Canadians to minimize the estate tax. If you want to get into specifics, call our office at (760) 558-9534.
What is it? A non-recourse mortgage is a mortgage secured by the house, with no personal liability for the borrower.
What does it accomplish? It provides a dollar for dollar reduction in the value of the US house/assets for US estate tax purposes (difficult to find US lenders offering non-recourse mortgages to foreign citizens and they will generally only provide them for a percentage (say 50%) of the value of the home).
Insurance Pays for the US Estate Tax
What is it? Snowbird purchases life insurance to pay for US estate tax upon death.
What does it accomplish? The cost of insurance can be considerably cheaper than the estate tax itself.
US House owned via a Foreign (not US) Corporation.
What is it? When the Snowbird dies, he does not own a US house (which is subject to the US estate tax), but owns instead shares of a foreign corporation (specifically not subject to the US estate tax).
Pros: Shares of foreign country’s corporation is not part of a US estate, so very favorable for the US estate tax.
(i) Shareholder benefit taxation in Canada and other countries (must pay tax on rental value).
(ii) Poor for US income tax purposes. When any corporation sells the house, the corporation pays 35% tax of the appreciation (instead of 15%).
US House owned via a Partnership (either US or foreign partnership).
Again, when the Snowbird dies, he does not own a US house (which is subject to the US estate tax), but an interest in a foreign partnership (which may or may not be subject to the US estate tax).
Pros: Partners are taxed as individuals. So upon sale, they are entitled to the low 15% capital gains rate.
Cons: Uncertainty on whether US estate tax is imposed on value of partner’s interest. However, domicile of partners (presumably foreign) is a positive factor in partnership interest not being subject to the US estate tax, but where partnership is conducting business also important.
Important Final Partnership Note:
Partnerships may “check the box” and elect to be taxed as a corporation. Many practitioners believe a partnership electing to be taxed as a corporation is more clearly not subject to the US estate tax. However, the partnership checking the box is now subject to the higher 35% corporate tax when selling the house.
QDOT (Qualified Domestic Trust)
What is it? A trust which holds the Snowbird’s US property.
What does it accomplish? Upon the death of one spouse, property in the QDOT is transferred free of tax to the other spouse (not otherwise available to non-US citizens). Avoids probate upon death of first spouse.
What are QDOT requirements? At least 1 trustee must be a citizen or bank (if QDOT holds more than $2 M, then the trust must be a US Bank, or the trustee can furnish a bond).
Only legally recognized spouse for Federal US purposes qualify (i.e. no same sex spouses).
No more than 35% of the value of real property in the trust can be outside the US.