What's new in inheritance tax in the U.S.

The majority of taxpayers are not subject to U.S. inheritance tax. It is only levied on the extremely wealthy," notes Dean Smith, a partner at Cadesky and Associates LLP in Toronto.

The U.S. Tax Cuts and Jobs Act increased the inheritance tax exemption threshold to $11.4 million in 2019 from $5.49 million per person in 2017.

For Canadians and other non-U.S. citizens, the determination of U.S. tax liability depends on the value of their worldwide estate, including their U.S. property and securities. The formula used to make that determination is complicated. "The math is convoluted, but what it boils down to is that if the global estate''is less than $11.4 million, you don't owe inheritance tax in the U.S.,' Reed says.

The maximum inheritance tax rate in the U.S. is 40 per cent of the value of the estate. "This can create a significant tax bill when a Canadian resident who owns U.S. real estate or a large portfolio of U.S. stocks dies: under domestic U.S. law, only $60,000 of an estate is protected from inheritance tax," Reid writes in an article for Advisor'\''s Edge.

In other words, if a Canadian resident dies owning assets in the U.S. - stocks, bonds, real estate, etc. - the total value of which exceeds $60,000, the resident's estate must apply for an exemption under the treaty by completing Form''should talk to clients about this part of the process, says Reed: "A lot of people don't know about the tax exemption. They think that because they are within the limit, they don't need to do anything." That kind of thinking can set a legacy up for financial trouble with U.S. tax officials.

The Form 706-NA is required to disclose detailed information about the decedent's entire worldwide estate, including so-called "U.S. property" (property located in the U.S.) such as securities, real estate and U.S. investment funds. The estate must provide dollar values, determined according to U.S. tax principles, for each asset. "Obtaining the correct valuation is costly and burdensome, and''undervaluation can result in heavy penalties,'" Reed writes in his article. "Perhaps most importantly, not filing Form 706-NA at all can result in heirs inheriting assets held in the U.S. with a cost basis of zero.

Time is also an important factor. Application for the exemption must be made within nine months of the estate owner's death, but many people may not think about it if the date does not fall within the tax period, notes Webel: "Financial advisers need to take care of this. "

There is another problem with the new inheritance tax - its expiry. Under the statutory time limit''action, unless timely action is taken, the exemption threshold will revert to $5 million, adjusted for inflation, in 2025.

Nevertheless, Smith warns that the threshold could change after the 2020 U.S. presidential election, pointing out that historically Republicans have not been in favor of the inheritance tax, arguing that it is double taxation, while Democrats have supported such a tax as a way to encourage the wealthy to pay more into government coffers.

The uncertainty of the future calls for different scenarios based on different exemption thresholds. "Don't assume things will stay the same," Webel warns. She recommends that you conduct''those taking advantage of the increasing basic exclusion amount [BEA] between 2018 and 2025 will not be affected after 2025, when that threshold is scheduled to decrease,' the IRS Q&A document states." "The regulations provide a special rule under which the inheritance tax credit is calculated using the highest BEA applicable to gifts made during life and the BEA applicable at the date of death. "

POTENTIAL TAX ON WEALTH IN THE US With the emergence of Massachusetts Senator Elizabeth Warren as a Democratic U.S. Representative contender, the possibility of a wealth tax in the United States has increased. Warren is likely to introduce a 2% annual tax on net worth''households valued between $50 million and $1 billion, above which the threshold would be increased to 3%. Warren's net worth calculation includes real estate, closed businesses, retirement assets, assets held by trustees or minor children, and personal property valued at more than $50,000. The logic behind the policy is to limit growing inequality because, it is argued, the super-rich are not paying their share of taxes. Some proponents of the logic point to the influence of French economist Thomas Piketty, who found that the return on capital exceeds productivity and wage growth favors the accumulation of more income and''wealth for the wealthy. Warren's platform states that the richest 130,000 American families control almost as much wealth as the 117 million poorest families. In Canada, a 2018 report by the Canadian Center for Policy Alternatives notes that fewer than 100 families with a net worth of more than $1 billion have accumulated more wealth since 1999 than the poorest 12 million Canadians. Warren's 10-year tax estimate is $2.75 trillion and includes a "substantial increase" in the Internal Revenue Service (IRS) budget. To prevent capital flight, she would impose a 40% 'exit tax' on net worth above the $50 million threshold for Americans renouncing citizenship. Wealth Tax''Abroad In 2018, a report by the Organization for Economic Cooperation and Development (OECD) tracked the decline of wealth taxes among OECD member countries, from 12 in 1990 to 4 in 2017. According to the report, taxes are being eliminated because of administrative problems and because taxes do not contribute to wealth redistribution and income generation. The OECD report indicates that there is a case for addressing wealth inequality through taxation because wealth inequality exceeds income inequality. However, the report adds that wealth distribution through taxation of capital income, inheritance and gift taxes may make more sense. For countries implementing a wealth tax, the OECD report recommends:''set a high threshold to tax only the very rich, avoiding excessive burdens and capital flight keep the value of taxpayers' net wealth constant over several years to avoid annual assessment limit debt deduction develop third party reporting avoid international double taxation of wealth. - Mark BurgessAG/p>