As part of the ‘Donald’s’ post-election “promises” we heard rumours that US gift and estate taxes were going to be repealed. While we did not see a repeal, we did see a significant change to the rules related to US gift and estate tax. The particular change came forward in the US Tax Cuts and Jobs Act (“TCJA”) which was signed into law on December 22, 2017.
Specifically, the amendment set out in the TCJA has doubled the unified exemption available for US federal gift and estate tax to approximately US$11.18 million (inflation indexed). As with many of the past amendments related to US gift and estate taxes, the new enhanced exemption will apply to gifts and deaths that occur after December 31, 2017, but the new rules will sunset on December 31, 2025. At that time, unless further legislative changes are enacted, the unified exemption will return to the amount that was in existence prior to December 31, 2017.
For those of you who have been paying attention to All About Estate blogs on US gift and estate taxes, this amendment has doubled the exemption that formerly applied to US citizens. Unfortunately, it has not otherwise altered the unified exemption that is available for Canadian citizens who are otherwise non-resident of the United States – referred to as non-resident aliens.
Under the US Internal Revenue Code the unified exemption available for non-resident aliens remains at US$60,000. However, the Canada-US Tax Treaty allows a non-resident alien who is a Canadian resident to benefit from an exemption that is equal to the greater of: (i) the US$60,000 available under the Internal Revenue Code; and (ii) the exemption that is otherwise available to a US citizen multiplied by a fraction where the numerator is the value of the deceased’s gross US situs estate and the denominator is the value of the deceased’s worldwide estate. The effect of this is that a non-resident alien who is a Canadian resident will not be subject to US estate tax if their worldwide estate is less than the unified credit. As noted above, as a result of the TCJA this is now US$11.18 million until December 31, 2025.
One of the complexities that will arise with this legislation, as has been the case with prior amendments to the US gift and estate tax regime which had sunset clauses, is that it is unclear whether there will be claw back provisions applicable to the extent someone makes a gift today but otherwise dies after the sunset provision takes effect. Notwithstanding, the enhanced exemption will certainly provide many Canadians who have a worldwide estate of less than US$11.18 million some comfort that they do not need to engage in any complex planning to be outside of the US estate tax net. Or at least they will have this comfort until December 31, 2025. At that time they will want to pay attention to whether there are any further changes or whether the rules revert back to what they were prior to December 31, 2017. So … as with all things related to the US gift and estate tax regime, stay tuned!