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How Can Canadians with Houses in Palm Springs (and all of the US) Be Subject to the US Estate Tax, Part I

In a previous post, we introduced the concept that Canadians with property located in the US are potentially subject to the US estate tax upon their death. This is true even though the Canadian snowbird may never spend enough time in the US to make themselves US residents for tax purposes. In fact, this can be true of the Canadian who spends almost no time in the United States. That’s because the US levies its estate tax on a foreign citizen’s property located in the US. Ultimately, it’s the US location of the property that matters. But note, not all property located in the US is included in the estate tax computation.

What’s Included?
Canadians are generally subject to US estate tax on their assets located within the US (US “situs property”) upon their death. The following types of property constitutes US situs property for the purposes of the US estate tax:
1) All real estate located in the US (this is generally the big one);
2) Tangible personal property located in the US (these are objects which can be moved touched or felt, such as jewelry, boats and art (which the Canadian citizen might hang in their US home));
3) Shares of stock of a US corporation; and
4) Golf Club Memberships.

What’s Not Included?
Not all property located in the US is subject to the estate tax. Property located in the US, but not included in the computation of the US estate tax, includes:
1) Money kept in US bank accounts, either checking or savings, up to certain limits (any funds protected by the FDIC is exempt); and
2) Life insurance issued by a US insurer.

Also, very important, nonrecourse debt (debt where the only security is the house; the borrower is not personally liable) is subtracted from the value of the house in determining the value of the total US estate subject to the estate tax. This gets us to an interesting planning discussion on how to best avoid the estate tax, which we will discuss in a later post.

Americans Who Die in 2011/2012 Are Permitted to Exclude Their First $5M in Assets From the Estate Tax
One of the most hotly contested issues in American politics is how much an individual should be able to exclude from his or her estate for the estate tax computation. In 2011 and 2012, the answer is $5M. That means generally that each individual who dies with $5M or under in 2011 and 2012 will owe no estate tax. Note, before 2011 the exclusion limit was $3.5M. It is possible after 2012 the exclusion amount will drop significantly, perhaps to as little as $1M or even $0 (which would mean, if changed to $1M, people who die in 2013 with assets over $1M would be subject to the estate tax …i.e., it is quite possible in the future a lot more estate taxes will be going to the IRS).

So How Are Canadian Snowbirds Affected by the US Estate Tax?
As we discussed before, the IRS will count the Canadians included assets (see above) in the US estate tax computation. So the real question is, how much of the $5M exclusion amount (again, this amount could go down significantly in the future) can a Canadian citizen (non-US resident) claim? That answer is governed by the US-Canada Tax Treaty, and is the subject of our next post.

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