US Real Estate Planning
On June 17, 2021, cross-border specialist Kevin Gluc joined us to discuss the legal implications of Canadians owning real estate in the United States.
Planning for Purchases of US Real Estate
There are several possible approaches for Canadian ownership of US vacation property. If ownership is to be held by an individual, it can be held solely by the individual owner, as joint tenants with a right of survivorship, or as tenants in common.
US real estate can also be held by a trust, a Canadian corporation or a partnership.
The pro-rated treaty exemption applies to US real estate. That is, there will not be US estate tax owing if the non-US testator has worldwide assets of less than $11.7 million.
According to Kevin Gluc, owning US property as joint owners may not be the best solution. The presumption with joint owners is that the full value, not 50%, is owned by the first spouse to die. Then, because it passes to the survivor, the survivor's estate has to include 100% of the value again when they die. Estate Tax may end up being paid twice on the same value.
Owing the property as tenants in common avoids this particular issue, but still gives rise to potential for US estate tax.
Owning US Real Property in Individual Name
Where tenancy in common or individual ownership is used, Kevin suggested considering using a spousal trust to deal with individually owned property. An absolute gift to the surviving spouse would be that it would have to be included in their estate for tax purposes. If it is held in a trust, it doesn't form part of the estate of the second to die.
Inter Vivos Trust to Own US Real Property
This is a popular method.
The settlor/grantor forms the trust for the benefit of spouse and descendants, funds it with cash and the trust purchases US real property. If properly structured, the property may be sheltered from US estate tax and estate tax fillings or probate may not be required.
Before your client signs the agreement to purchase US property, he or she should get US advice. The contract to purchase US real property should be in the name of trustee/trust and not in name of one or both spouses. This is because a contract executed by spouses gives rise to US gift and estate tax issues.
If the contract is executed before the trust is formed, it should be terminated and a new contract entered into between trustee/trust and seller.
The beneficiary spouse cannot contribute to the trust, although he or she can pay the ordinary expenses of home ownership, like utilities, taxes, etc.. The beneficiary spouse should not fund capital improvements.
Thanks for reading!
If you are interested in watching the full webinar recording, you can do so here.