What is the current state of play when it comes to U.S. estate tax, including its impact on many Canadian tax residents and others with U.S. connections?
First, an update on some key tax rates and concepts for 2023.
The lifetime exclusion amount has increased substantially due to the rise in the inflation rate to which it is pegged, and for 2023 is now $12.92 M (USD), and for a married U.S. couple $25.84 M (USD) combined. This increase is more than 7% from 2022, and if the inflation rate continues to be high, by 2025 at 5% the exclusion amount will be over $14.2 M (USD).
However, the lifetime exclusion amount is set to decrease on January 1, 2026 to $5M (USD), adjusted for inflation since 2011, unless legislation is passed by the U.S. Congress.
There is significant uncertainty with regard to what the future exclusion amount may be, and also with regard to the future of U.S. estate tax, given the change in control of Congress as a result of the recent mid-term elections and a presidential election in two years.
But for now, in 2023, there is a lull and some complacency. Expect heightened uncertainty in 2024, and even more in 2025, as the sunset provision described above effective on December 31, 2025 grows nearer. Given the higher exclusion amount that currently exists, careful consideration should be given by U.S. persons who are subject to U.S. estate tax to take advantage of it by making gifts, while balancing against other risks.
In 2023, the annual exclusion amount for making gifts has increased to $17,000 for a U.S. person, or for a married U.S. couple, $34,000 combined. For gifts from a U.S. citizen to a non-U.S. citizen spouse the annual exclusion amount is $175,000 (USD). This annual exclusion is the amount that a U.S. person can give to each recipient each year without paying any gift tax or using part of his or her lifetime exclusion amount.
Given the large exclusion amount that presently exists, few estates in the U.S. pay any U.S. estate tax. In 2021, only 2,600 estates paid any U.S. estate tax, which totalled about $18.4 billion out of total U.S. federal tax revenue of more than $4 trillion, and only about 0.08% of persons who died in 2020, which counted for about 3.4 million in total, were subject to U.S. estate tax.
While Democrats have proposed reductions in the exclusion amount for U.S. estate tax to $3.5 M (USD) to address wealth inequality, including in the Biden administration’s failed 2022 proposals, Republicans have proposed repealing it altogether.
How can U.S. estate tax impact Canadian residents who are not U.S. citizens, green card holders or otherwise considered domiciled in the U.S. for U.S. estate tax purposes?
If you have U.S. situs property and when you die your worldwide estate is above the lifetime exclusion amount [currently $12.92 M (USD) as noted above], including U.S. real property, directly owned shares of U.S. companies (even if held in a registered account such as a RRSP/RRIF or TFSA), or tangible personal property situate in the U.S., as well as certain other property, you can have U.S. estate tax exposure. It is worth noting that certain assets which you may not think are included in your worldwide estate, in fact are included such as an interest in jointly-owned U.S. real property, subject to exclusions, insurance policies, and interests in certain trusts.
There is certain relief available against U.S. estate tax, including under the Canada-US Tax Treaty for those whose worldwide assets exceed the U.S. lifetime exclusion amount, as well as a basic general exemption amount of $60,000 (USD) which would cover U.S. situs assets up to that amount. U.S. estate tax rates begin at 18%, and top out at 40% once U.S. situs assets exceed $1M (USD).
The U.S. estate tax regime impacts estate planning and estate administration for many people, including if you have children who are U.S. persons who have U.S. estate tax exposure on the inheritance they receive from you, are married to a U.S. spouse, are a Canadian citizen but also have U.S. citizenship, are permanent residents of the U.S., or have U.S. situs assets.
— Margaret O’Sullivan