raylopez99 wrote:

- quote -

This is getting more complicated all the time. I know that
USC's have to report all world wide income, but I didn't
realize that PR's have to as well.

The only bonus is that Canada's estate taxes are much lower
than the US. In fact, some provinces have no estate tax and
the federal tax is very low compared to the US. I also know
that the treaty is set up to prevent double taxation for the
most part, but I don't understand how the IRS can expect to
collect tax from assets owned, acquired or remaining in
another country.

This brings me to another question. Many Canadian snowbirds
own RE in the US, mostly in AZ and FL, but they reside in
Canada. How does the IRS work that out? I assume the tax
treaty comes into play, but I'm also sure the IRS will want
their part of the taxation from selling the US based
property upon the death of the owner.

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- quote -

Yes, the treaty can be found at
http://www.irs.gov/pub/irs-trty/canada.pdf
See page 75 of the PDF file for Article 19 of the Protocol.

Andrew Mitchel
Essex, Connecticut
www.andrewmitchel.com

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sparksals wrote:
- quote -

Yes, that is correct. Your estate will be double taxed,
first in Canada, then in the USA, but you can offset any
taxes paid to Canada when you pay the US IRS (if there's a
tax treaty between the two countries, as I suspect there
is). What this means then is that your estate will pay
essentially the greater of the estate taxes of Canada or the
USA. As a practical (albeit illegal) matter, I've heard
that most people don't bother telling the USA what worldwide
assets they have, and since as of the moment there is no
worldwide database for people's assets (but probably in 25
years, with 'tax harmonization/ equalization' efforts, there
might well be), then this issue is for all practical
purposes academic. For now.

- quote -

I'm not a tax person but it seems the language implies so
("whether or not").

RL

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I'm going to respond in one message to avoid too many posts.

Stu wrote:

The intent of the law is that if you survive your husband, a
special trust can be set up to give you the full marital
deduction available to citizens. The catch is that the
trust must guarantee the property will be taxed in the US
when you die.
============

Thanks for that info, Stu. That makes perfect sense.

================
Ray Lopez wrote:

- quote -

I'm really glad to hear that. I have to say that my estate
planning in Canada was never this complicated. I knew the
ropes and understood how the system works. This is like
finding my way through a huge maze.

- quote -

No kids and none planned for the future. Are you saying
that even if we don't have kids, any funds/property I have
in Canada would be part of the estate in the US? In other
words, my estate would be double taxed, first in Canada and
then the US?

I understand this issue is complicated, so if a simple
abridged answer is possible, I would really appreciate it.

- quote -

I want to make sure this is clear. ********This unfortunate
result arises whether or not the decedent-spouse was a U.S.
citizen.****** Does this mean that my US citizen spouse will
be taxed at the non-citizen rate should he survive me??

- quote -

Thank you so much for explaining the QDOT. When
establishing such a trust, is it possible to add to it
throughout the years or is only what is put in at the time
part of it? Since people accumulate property, funds,
assets, etc., over their lifetime, I don't understand how
that would work. Would another trust have to be set up each
time we want to add accumulated assets or does the whole
trust become part of the estate?

BillPatch wrote:

- quote -

Does this mean that the limit that can be gifted to me as
the non-USC is 120K from my spouse? What about gifts from
other people? If so, this is a bit of a concern. Currently,
my MIL gifts dh the annual 12K. She is looking into using a
large portion of her $1M lifetime gift to each of her 4
kids. Since AZ is a community property state, does that
mean the gift is also to me even if the cheque is written to
dh and subsequently, anything over the $120K would be
taxable even though dh is a USC?

- quote -

Is this the case if my husband survives me or only if I
survive him? I understand estate taxes are payable upon the
death of the 2nd spouse. Are you saying that regardless, my
estate will be taxed if I die first? I'm getting a bit
confused here. Will my husband still be eligible for the
unlimited spouse estate transfer if he survives me?

From what you wrote, it seems that making my estate larger
than my husband's is the way to prevent myself from being
taxed at a heavier burden should I survive him.

jmail7[at]andrewmitchel.com wrote:

- quote -

Gee, I'm finding all this complicated enough! Thank you
for the explanation of transfer of property and the limits.

jmail7[at]andrewmitchel.com wrote:

- quote -

I was wondering if this would come into play. Where can I
find the above mentioned article? Is it at the IRS website?

Thank you everyone for your responses. You have been so
very helpful. I think I'm more confused than when I started,
but that is to be expected. My taxes and estate planning
in the past were quite simple and it seems that in a very
short time, complex and complicated are understatements!

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sparksals wrote:

- quote -

There is an unlimited spousal exclusion on any amount
inherited by the spouse from the decedent. In addition to
this there is a tax credit such that (in 2006 to 2008)the
first $2 million of the taxable estate passes tax free. The
$2 million is reduced by taxable gifts made through his
lifetime. Taxable gifts include annual gifts in amounts in
excess of $12,000 (2006) per person, or $120,000 per alien
spouse. (unlimited spousal transfers are untaxed between
citizen spouses.)

- quote -

117K was last year's annual exclusion for non-taxable gifts
for spouses. Any US citizen or resident alien can currently
bequeath an estate of $2 million to anyone estate tax free
assuming no prior taxable gifts.

- quote -

Your course of action required for estate planning may
ignore estate taxes, if his estate is small enough. Annual
gifting of up to $120,000 to you may reduce the size of his
taxable estate while increasing your estate. A QDOT is
particularly expensive a trust to seet up and to administer,
and only deferrs estate taxation during your remaining life;
upon withdrawal of principal or your death the estate tax
becomes payable. Still, if his taxable estate is more than
$1 million above the maximum non-taxable estate

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In my earlier message, I mentioned that there was no marital
deduction to the non-citizen spouse. However, you are a
Canadian citizen. As a result, the U.S.-Canadian treaty may
apply. Specifically, you should look at Article 19 to the
1995 Protocol to the Income Tax Treaty.

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- quote -

Correct

- quote -

Correct

- quote -

Wrong. The 117K refers to the annual gift tax exclusion to
noncitizen spouses. That amount has been indexed for
inflation and is now 120K. If you inherit from your husband,
no "marital deduction" will be allowed unless the property
goes into a QDOT. Even though no marital deduction would be
allowed if the property does not go into a QDOT, your
husband would still be able to leave you $2,000,000 without
any federal estate tax if he died in 2006. The $2,000,000
amount gets higher through 2010 and reverts back to
$1,000,000 in 2011 and beyond.

There are additional rules for gifting to noncitizen spouses
and they get quite complex.

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sparksals wrote:

- quote -

I'm not a financial planner but I could play one on TV.

That said, you are on the right track. See below for more
info.

Another problem, besides the estate tax that might be paid
on the death of the first spouse, is if you have kids. In
theory (but not in practice--space does not permit me to
explain why) your WORLDWIDE estate (including assets unknown
to the US government) is subject to US estate taxes (which
revert after 2009 to a harsher rate than today), if you
marry a US citizen, and indeed, if you die in the US while
visiting as a non-tourist.

But that's a post for another day

RL

http://www.itaxcpa.com/QDOT_article.htm

Assets transferred at death to a surviving spouse who is a
U.S. citizen generally benefit from an unlimited marital
deduction and are thus U.S. estate tax free. In this case,
the assets are taxed at the death of the surviving spouse,
unless expended during the surviving spouse's lifetime.
However, if the surviving spouse is not a U.S. citizen, the
marital deduction is not allowed and thus the transfer is
taxed upon the first death (assuming the estate value
exceeds the applicable exclusion amount, currently $1.5
million for 2004 and 2005 increasing to $3.5 million in
2009). This unfortunate result arises whether or not the
decedent-spouse was a U.S. citizen. Lawmakers' concern in
enacting this seemingly harsh provision was that property
transferred could otherwise easily escape U.S. estate
taxation: first by reason of the unlimited marital deduction
and later (upon the subsequent death of the non-citizen
surviving spouse) by removal of the property from U.S.
estate tax jurisdiction during the surviving spouse's
lifetime.

The Qualified Domestic Trust Option

Instead of incurring U.S. estate tax upon the first death,
affected couples may choose to transfer the spousal bequest
to a special-purpose trust known as a Qualified Domestic
Trust or "QDOT" which provides the same benefit as the
unlimited marital deduction. A QDOT is a trust for the
benefit of the surviving spouse. QDOT income and hardship
distributions to the surviving spouse are U.S. estate tax
free, but distributions of trust corpus prior to death of
the surviving spouse are taxed at source (i.e., the QDOT
estate tax is withheld by the trustee). The property
remaining in the trust upon the surviving spouse's death is
subject to U.S. estate tax at that time.

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"sparksals" <sparksals[at]0608.zuym.com> wrote:

- quote -

The problem Congress wanted to remedy was the possibility
that a non-citizen would receive an unlimited marital
deduction and then leave the country, so that the property
would never be taxed.

The intent of the law is that if you survive your husband, a
special trust can be set up to give you the full marital
deduction available to citizens. The catch is that the
trust must guarantee the property will be taxed in the US
when you die.

Stu

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I'm not sure if this is a question for the Financial
planning group or taxation. I'm going to ask it here since
it does have to do with taxes upon death.

I am not a US citizen, but I am married to one. I do not
plan to take US citizenship, but I am a permanent resident.
I am from Canada and was well versed with the laws there and
I'm trying to learn the ropes here.

My husband and I are doing our estate planning. We are
working with a financial planner and she researched the
effect of my lack of US citizenship on our estate, if I
survive my husband.

I am told that there is a limit a permanent resident spouse
can inherit from their US citizen spouse and it's quite a
small number. From what I understand, there is no federal
estate taxation when the estate is being passed to a US
citizen spouse. The estate is only taxed when the second
spouse (the US citizen) dies. However, if I survive my
husband, anything over a certain amount (I think 117K) would
be taxed.

I know the way around this is to establish a trust, but I
have been told that there is a specific trust to establish
for persons in my situation - a QDOT? Can anyone tell me if
this is correct and if I have the information correct that
my husband's estate would be taxable should I survive him?

I apologize in advance for any mistakes in terminology.

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