Many people think that they can’t appoint a family member (often their child residing in the U.S.) or friend who is a U.S. resident or citizen as the executor of their estate because it will cause too many complications, or perhaps they may have received advice from a source that they simply cannot do it. We frequently hear this concern raised by our clients. There are a number of misconceptions on this issue. In this blog, I will try to alleviate them.
Although residency may be a factor in choosing your executor, the circumstances should be fully considered before ruling out a U.S. resident child or other U.S. person as a possible executor. Citizenship is not a relevant factor. To read more about the key factors in choosing your executor, check out our blog, “Who’s in Charge? Key Considerations in Choosing Your Executors”.
There are a number of issues to consider if your potential executor is a U.S. resident, including the residency of the estate from a Canadian tax viewpoint, reporting requirements, bonding issues, problems in instructing Canadian-based investment advisors, and practical constraints.
1. Tax Issues
The tax residency of an estate is a factual determination and is considered to be where the central management and control of the estate takes place, which is generally where a majority of executors reside, but not necessarily.
One estate planning consideration would be to name additional Canadian resident executors to act with a U.S. resident executor to ensure that the mind and management of the estate is in Canada and to accordingly keep the tax residency of the estate in Canada. This could include appointing two or more Canadian residents to act with a U.S. resident so that a majority of the executors are Canadian residents.
A power could also be included in your Will to allow the executors to appoint additional executors to provide flexibility to appoint additional Canadian resident executors should there be a need to do so at the relevant time.
2. U.S. Reporting Requirements
As a U.S. resident executor will have signing authority over the estate’s financial account(s), he or she may be required to file an annual information return called the Report of Foreign Bank and Financial Accounts (commonly known as “FBAR”) to the Department of Treasury (not the IRS), and there are penalties for failing to do so. The FBAR is an annual report completed by U.S. tax filers to disclose information about any financial accounts located outside the U.S. The FBAR is filed electronically and certain account information will need to be listed.
If the U.S. resident executor has accounts in Canada, which may be common when a child, for example, moves to the U.S. temporarily for employment, he or she may already be filing the FBAR annually.
The disclosure and professional fees should be considered, but in many cases should not be a deterrent to appointing a U.S. resident executor. To provide for flexibility, the U.S. resident executor can be appointed and he or she can renounce if in the particular situation and at the relevant time the FBAR reporting is an issue.
3. Bonding Issues
If a U.S. resident executor is appointed, he or she is required to give security, including by way of a bond, to the Court. An estate administration bond is a type of insurance policy which is used to protect the beneficiaries of the estate, including in case of negligence or fraud.
At the Court’s discretion, the amount of the bond may be reduced or dispensed with, particularly where all of the beneficiaries are adults and agree. If there are any minor or incapable beneficiaries, the executor may not be able to get this requirement waived by the Court, although the amount may be reduced in appropriate circumstances.
If a bond is required and the cost of the premiums are too high, the U.S. resident executor could choose to renounce his or her position as executor. In doing so, the U.S. resident executor would not participate in the administration of the estate, but could still be one of the decision-makers with respect to any ongoing trusts under the Will if the language of the Will provides for it.
4. Instructing Investment Advisors
Some investment advisors at Canadian financial institutions cannot take instructions from U.S. residents, including U.S. resident executors of a Canadian estate, because they are not licensed to provide investment advice to U.S. residents under U.S. securities rules.
To deal with this problem, a separate role, such as “investment trustee”, could be included in your Will. If instructing an investment advisor became an issue for the U.S. resident executor or trustee, having a separate role would allow the U.S. resident executor or trustee to not act in such role, while still participating in other decision-making.
Alternatively, the executors could choose to deal with an investment advisor who is U.S.-licensed. Many investment advisors are increasingly obtaining this accreditation.
5. Practical Considerations
There are no longer many practical constraints with respect to appointing a person who is at a distance and resides in the U.S. as an executor, so their place of residence should not be a deterrent to appointing them.
Email, video-conferencing and, recently, virtual commissioning, make it easy to efficiently address estate matters as they arise no matter where the executor resides. Some issues that may have caused practical challenges historically have become much easier to manage with modern technology.
This blog highlights some of the issues in appointing a U.S. resident executor and offers some practical solutions. The considerations in appointing an executor generally, and more specifically, a U.S. resident executor, are unique to each person’s circumstances and should be discussed with your legal advisor to find a solution that is appropriate for you.
In many cases, there is a solution available with expert professional advice to ensure your choice of executor is carried out. In estate planning, advice should never be “one size fits all”.
— Marly Peikes