What the U.S. Tax Cuts and Jobs Act of 2017 means to Canadian and U.S. citizens – changes to the U.S. Estate and Gift Taxes
In December 2017, the tax environment in the United States changed significantly with the passing of the Tax Cuts and Jobs Act of 2017 (TCJA). The changes included:
reductions to individual and corporate tax rates,
changes to the taxation of U.S. shareholders of non-U.S. corporations, and
a doubling of the amounts not subject to U.S. Estate and Gift taxes.
These changes affect U.S. citizens who live in the U.S. or Canada, and Canadian residents with U.S. situs assets (for example U.S. vacation properties and U.S. securities).
This issue of As a Matter of Tax looks at the changes to the U.S. Estate and Gift taxes.
Estate and Gift Taxes
U.S. citizens who live in Canada, including dual citizens, are subject to U.S. estate tax on their worldwide assets (i.e. all property, real and personal, tangible and intangible).
For individuals who are neither U.S. citizens nor considered resident in the U.S. for estate tax purposes, the taxable estate is limited to U.S. situs property, which includes:
shares or debt of United States corporations (including those held in a Canadian registered plan such as an RRSP, RRIF, RESP or TFSA),
debt of certain U.S. persons,
U.S. real property and tangible personal property situated in the United States, and
a life insurance policy issued by a U.S. insurance company on the life of another person (whether the insured is a U.S. person or a non-resident alien).
Some good news for the next seven years
U.S. citizens and residents can claim an applicable credit against their estate tax and gift tax liability. The TCJA doubles the applicable credit that a U.S. citizen can claim for 2018 through 2025.
For 2018 and the subsequent seven years, U.S. citizens and residents are entitled to an applicable credit of US$4,417,800 (indexed for inflation each year) against their estate tax and gift tax liabilities. By comparison, the applicable credit for 2017 was US$2,141,800.
The effect of this current credit is to eliminate the U.S. estate tax liability for taxable estates of up to US$11,180,000 for 2018 (US$22,360,000 in total for married individuals). After 2025, the TCJA law sunsets and the applicable credit will be reduced, likely by half.
Canadian residents who are not U.S. citizens are entitled to a prorated applicable credit of up to US$4,417,800 for 2018 and the subsequent seven years. The deceased’s estate is entitled to an applicable credit equal to the greater of US$13,000 or the amount determined by this formula:
Based on this formula, Canadian residents will not have to pay U.S. estate tax in 2018 or the next seven years provided the value of the deceased’s worldwide estate does not exceed US$11,180,000.
You can get more information on U.S. estate taxes from this tax topic U.S. Estate Taxes.
Life insurance is still a good estate planning tactic
Typical planning strategies for dealing with U.S. estate taxes include:
buying life insurance to fund the liability, and
using irrevocable life insurance trusts to own the life insurance and keep it out of the value of the estate.
The reality is that, even after the doubling of the applicable tax credit, estate tax exposure still exists for many U.S. persons:
many states have estate and inheritance taxes with much lower exemptions than the federal exemptions
ultra-affluent people whose estate exceeds the increase exemption amount will still have significant estate tax exposure
the increased exemption will expire after December 31, 2025 and the gift and estate tax exemptions will return to a US$5 million exemption, indexed for inflation
with the new higher exemption reducing in 2026, if a client doesn’t use the full exemption during this time, he or she may lose the unused portion of the applicable credit
Furthermore, even with the increase to the applicable credit, there are still significant benefits to having life insurance:
diversification and IRR analysis,
income tax advantages,
offsetting income taxes on assets, and
creating a legacy for heirs and “protective” inheritances