US citizens who live in Canada are liable for US gift and estate tax on their worldwide assets, even if they have never actually lived in the US. This means that assets transferred during life or on death are taxed by the IRS at rates of up to 35%, subject to certain annual and lifetime exclusions.

On January 1, 2013, the lifetime gift and estate tax exemption amount is set to drop from the current $5 million down to $1 million, meaning that US citizens will be taxed at a rate of up to 55% on the fair market value of their estate over $1 million if they pass away after this calendar year.

The US gift and estate tax system is unified, which means that citizens can choose whether they want to take their lifetime exemption on gift taxes, on estate taxes, or a combination of the two. Given the pending change in that exemption amount, US citizens have only a few months left to remove up to $5 million from their estates on a tax-free basis, rather than getting taxed on everything over $1 million on death after this calendar year.

How this opportunity is seized upon will be different for everyone. Some may want to make large gifts to younger family members, while others may be able to transfer assets into irrevocable trusts that are sheltered from estate tax. As is often the case, the facts and circumstances of each family will determine the most appropriate solution to the estate tax dilemma.

An added layer of complexity arises when the donor is a US citizen living in Canada, because such individuals are subject to the tax regimes of both countries. Specifically, when a US citizen living in Canada makes a gift, the US may levy gift tax, while Canada may impose a capital gains tax on the transfer. Unfortunately, the Canada-US Tax Treaty does not provide any relief under this situation. As such, when planning a gifting program as part of a person’s estate plan, the tax treatment in both countries must be carefully examined.

Nonetheless, the window of opportunity is rapidly closing to save as much as $2 million is US estate tax by taking advantage of the $5 million exemption available through this year. This is an opportunity worth considering very carefully, and a cross border tax and estate planning expert at Altro & Associates is a great place to start.