“Within nine months of the property owner’s death, the estate tax is imposed at a flat 40% rate,” says Bob Wood, of Ward Chisholm, a firm that specializes in the U.S. tax system and Canadian property investment south of the border. “So that means a prudent investor would anticipate the liquidity need to pay the estate tax on the U.S. properties, so those properties don’t have to be disposed of in a fire sale, to raise the money to pay for the tax. And that can be met with life insurance.”
The intricacies of the U.S. estate tax law can be confusing for Canadian investors – and that has taken on added importance given the rush to buy American properties that occurred when real estate prices plummeted in the U.S. following the 2008 housing market crash.
Given the numbers of Canadian investors in the U.S. market – with CBRE estimating $10 billion in direct commercial investments in 2014 alone – revisiting clients’ life insurance policies would make sense, to ensure that there is enough liquidity in place to cover any future tax hit.
While insurance does provide a lump sum to deal with the costs of lawyers and taxes upon the sale of an American property, there are several credits available to reduce the tax required to be paid to the United States, Wood told LHP.
First, the estate is entitled to an estate tax credit for foreign taxes paid at the time of the decedent’s death (such as Canada’s tax on deemed dispositions at death). Second, there may be special circumstances that give rise to special tax credits.
For example, the decedent’s estate may include property received within 10 years of death, which was previously subject to a U.S. estate tax.
Third, regardless of the availability of any other credits, the estate of every non-U.S. person who owns U.S. situs assets is entitled to an estate tax credit of $13,000. This results in an exemption of the first $60,000 of U.S. situs assets from U.S. estate taxation at the death of the non-U.S. person.
Those bequeathed American properties may be in for a surprise when they are slapped with capital gains, gifts or estate taxes. Still, it’s a pain that can be eased with life insurance, says one tax expert.