Canadian clients contact the cross border experts at Altro & Associates every day, looking for the perfect structure to buy real estate investment/vacation properties in the United States. With all of the distressed property in the U.S., there is no better time for savvy Canadian investors to purchase American real estate. However, Canadians need to be aware of some of the issues that can trip up investors.
The first issue that Canadians need to be aware of is U.S. probate. Probate is the legal procedure used to settle the property of the deceased. Probate will have to be conducted in the U.S. even if your estate is already probated in Canada. Probate is expensive and time consuming. A Florida attorney is allowed by statute to charge 3% of the fair market value of your U.S. assets as a probate fee.
The second issue that Canadians need to be aware of is incapacity. If a property is held in the names of two or more people (such as husband and wife) and one person becomes incapacitated, the property will effectively be frozen. A costly and time consuming guardianship procedure will need to be undertaken to un-freeze the property.
Buying a property in your name or your children’s names may expose the property to creditors should you or your children happen to run into such problems (i.e. a negligence action against you brought by a tenant of your leased property). Further, if you decide to bequeath the property to your children upon your death and they get divorced, their ex-spouse may have a claim for their share of the property, not to mention U.S. Gift Tax issues.
U.S. Estate Tax is another issue of concern to the Canadian buyer. There will be a U.S. Estate Tax upon the death of a Canadian if the Canadian owns more than $60,000 of U.S. Assets and has a worldwide net worth of over $5,000,000. The 35% U.S. Estate Tax is on the total value of all U.S. assets. In 2013, the U.S. Estate Tax law is scheduled to reduce the exemption on worldwide assets from $5,000,000 to $1,000,000 and the Estate Tax rate will increase from 35% to 55%.
A very efficient strategy to address all of these problems is the specially crafted Cross Border Trust℠. A Cross Border Trust℠ speaks to both the Canadian and the U.S. regimes so it can help avoid the issues of probate, incapacity, and provide creditor and divorce protection for your children. Depending on your family situation, the value of your U.S. and worldwide assets, an enhanced version of the Cross Border Trust℠ (called a Cross Border Irrevocable Trust℠) can even eliminate the U.S. Estate Tax altogether. It’s important to discuss all the relevant facts with one of our Cross Border experts beforehand so they can help determine which structure is best for you.
Another potential solution is purchasing your property in a corporation. This will avoid the problems of probate, incapacity and may provide you with some degree of liability protection. However, we often prefer the Cross Border Trust℠ because it is a maintenance free vehicle, unlike a corporation. It is important to note that any capital gains are taxed at a rate of 15% for a Cross Border Trust℠ compared to a capital gains tax rate of 40.5% (in Florida) for a corporation. It should be noted that there are some situations where a corporation is the best solution for our client—specifically, if all of the client’s funds are in a corporate structure. A consultation with a Cross Border Expert will help determine which plan is best suited for you and your investments.
The above are just a few of the pitfalls that can trap unsuspecting Canadians. Canadians should always seek advice from qualified tax and estate Cross Border Specialists. Altro & Associates, LLP can help you in these matters. For a consultation please contact us.