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9 Essential Elements of Cross-Border Transition Planning

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united-states-canada-flags“How do I move my financial life to another country?” It’s a question we hear from many clients as they begin making a cross-border transition. Whether you are making the move to the U.S. or Canada, you want to transition your finances smoothly and seamlessly while saving time, headaches, and every dollar you possibly can.

Much like financial planning, transition planning is a process and not a transaction or an end in itself. And like financial planning, the most effective transition planning hinges on a clear understanding of what you want to achieve in terms of lifestyle both now and in the future.

One of our key roles as cross-border financial planners is to learn where you are trying to go (aka, your goals and objectives) and then design a detailed plan to test the viability of your goals/objectives and ultimately get you to your destination. After all, without a flight plan, how can you know which direction to go?

Our firm’s Canada-U.S. transition planning focuses on 9 key areas that should be considered when making a move across the border:

  1. Customs Planning: This element addresses the process of relocating your assets to Canada or the U.S. Transporting belongings such as cars, pets, guns or other valuables across the border brings up specific issues that need to be sorted out ahead of any move.
  2. Immigration Planning: Whether it’s temporary or permanent, moving to and living and working in Canada/U.S. has legal ramifications. Immigration planning covers all the legal means of crossing the border.
  3. Cash Management Planning: This area includes the development and analysis of your net worth statement and an assessment of your cash inflow/outflow during your move. Our team can look at the ownership of your assets (whether between spouses or between the U.S. and Canada) and calculate a variety of financial ratios to see what challenges or opportunities arise. Your net worth statement is a benchmark from which we can analyze the impact of your move over time. We can also focus on the cross-border transition of cash and offer strategies to simplify your financial life before your move. This includes developing a prudent, purposeful and ongoing approach to currency conversion and foreign exchange.
  4. Income Tax Planning: When making a cross-border move, a comprehensive review of your current and prospective tax situation is crucial as it can reveal strategies to reduce your tax liability before and after your move. Effective tax planning reviews various techniques that may apply to your situation—including tax planning strategies that are state and province specific—all with the aim of curbing your tax liability.
  5. Independence Planning: Will you have enough money to sustain your retirement lifestyle through the decades? Independence planning uses current assets, income, and expenses to create detailed projections that help determine the long-term achievability of your financial and lifestyle objectives. Such analysis can provide valuable insights into which actions, if any, may be needed to attain your goals.
  6. Education Planning: This element looks toward the future to determine: how much is required, at what point in time, and what you need to do to fulfill future education goals. This planning can also include a review of your cross-border education savings options and what to do before a move.
  7. Risk Management: Catastrophic events such as fire, theft, illness, disability or death could devastate what has taken a lifetime to build. Risk management looks at your current exposure for risk and determines the most prudent course of action to address such risk. There are numerous differences in the way risk is managed in the U.S. and Canada. When making a cross-border move, it is vital to ensure you will be fully covered.
  8. Estate Planning: Estate planning assists in establishing order to your affairs so that you can: 1. continue to control your property while alive, 2. provide for the needs of loved ones should you become disabled, and 3. leave what you have to whomever you want, in the way that you want, and at the lowest overall cost.
  9. Investment Planning: This area focuses the investment objectives you established in your financial plan and then develops an investment portfolio to achieve your desired rate of return while also managing for tax liability. An essential part of the transition planning process is developing a properly structured and integrated investment strategy that includes your investment accounts on both sides of the border.

Are you ready to begin the transition planning process? Whatever your goals and needs are, the experts at Cardinal Point Wealth Management can help ensure a smooth road to your cross-border destination.

Terry Ritchie is the Director of Cross-Border Wealth Services at the Cardinal Point, a cross-border wealth management organization with offices in the United States and Canada.  Terry has been providing Canada-U.S. cross-border financial, investment, tax, transition, and estate planning services to affluent families for over 25 years.  He is active as an author, speaker and educator on international tax and financial planning matters. www.cardinalpointwealth.com

U.S. Estate Planning for Non-Citizen Spouses

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Avoiding the estate tax when you’re married to a foreign national

As cross-border specialists, one of our key concerns in working with each client is the question of citizenship. This is especially true for estate planning, as developing a plan without taking into account citizenship could have dire tax consequences and create hardship for a surviving spouse.

According to current estate tax law, an immediate tax can be enforced on assets passed to a spouse who is a foreign citizen. Cross-border estate planning plays an important role in preventing a hefty tax bill due to these U.S. estate tax rules. If you’re in a similar situation, here’s what you need to know.

Estate Planning Basics
When we work with a married couple to develop an estate plan, one of our key goals is to preserve and protect assets for the surviving spouse and children. Fortunately, with advanced planning, federal estate taxes can often be reduced or avoided.

Currently, if you die with a taxable estate worth over $5.34 million, the IRS can take 40% of the excess. One common approach to avoid this federal estate tax rule is to give away some of your assets to children and grandchildren upon your death, either directly or through trusts, with the remainder going to your surviving spouse. You can bequeath an unlimited amount to your spouse free of federal estate taxes—as long as your spouse is a U.S. citizen.

You can also gift away an unlimited amount to your spouse before you die without incurring a federal gift tax if he/she is an U.S. citizen. This ability to make unlimited, tax-free wealth transfers to your spouse is known as the “unlimited marital deduction.” This privilege is an essential part of many estate and gift tax planning strategies.

The Citizenship Conundrum
Unfortunately, traditional estate tax planning strategies that work for most married couples—such as the unlimited marital deduction—are not available when one spouse is not a U.S. citizen. In 1988, the U.S. Congress eliminated the unlimited marital deduction for when a U.S. citizen spouse passed property to a surviving non-citizen spouse. This has resulted in a significant dilemma and substantial federal estate tax rates for those leaving assets to a spouse who doesn’t hold U.S. citizenship. Further, when the marital transfer rules changed, a new rule was also introduced that limits the annual transfer of assets directly to a noncitizen spouse without incurring any tax.

Let’s look at an example to see the impact this would have. Let’s say a U.S. citizen husband passes away, leaving $5.34 million to his children and the remaining $1.5 million to his non-citizen wife. Given the $5.34 million federal estate tax exemption, the amount left to the children is free from federal estate taxes; however, the $1.5 million left to the non-citizen spouse is not exempt. What’s the damage? $600,000 ($1.5 million x 40%) in federal estate taxes! Let’s say the husband leaves his entire estate worth $6.84 million to his non-citizen wife. The federal estate tax is still $600,000 because the initial $5.34 million is protected by the federal estate tax exemption.

Another problem that arises is that U.S. assets bequeathed to a surviving non-citizen spouse using the estate tax exemption may still be subject to estate taxes upon the death of that non-citizen spouse. This is because a non-citizen spouse who is not “domiciled” in the U.S. will only have a $60,000 lifetime exemption instead of the $5.34 million exemption.

Planning Options
What are some estate planning options if you or your spouse don’t qualify for the unlimited marital deduction? Let’s return to our example.

For starters, our married couple could take steps to have the wife become an American citizen before her husband’s death. Another alternative is to set up a Qualified Domestic Trust (QDOT), which would enable our couple to defer the estate tax until the death of the surviving non-citizen spouse. How does it work? A QDOT allows for assets to be held in trust for the noncitizen spouse without incurring an estate tax, thereby putting off taxation until the spouse’s death or assets are withdrawn. This would also provide an annual income stream for the wife and allow extra time for her American citizenship to come through. Under the Canadian Income Tax Act, a properly structured QDOT can also qualify as a spousal trust.

If certain qualifications are met, another cross-border approach we take with our clients is to look at the marital credit of the U.S./Canada Tax Treaty. It’s important to note that this route and the QDOT option cannot be used together.

Another consideration is to introduce a gifting strategy where the husband gifts property to his wife; as much as $145,000 per year would be allowable as a tax-free transfer under current tax law. Such gifts can help reduce the amount of assets passed to a non-citizen spouse and also help mitigate tax issues down the road.

In addition to these options, there are a number of cross-border planning approaches that can be established in advance as part of a total financial planning process. Life insurance, real estate and retirement plans should all be examined to look at opportunities to protect assets from taxable events upon death.

We advise families that a careful, advanced planning approach is the key to avoiding potential pitfalls when a spouse is not a U.S. citizen. After all, one of our most essential roles as an advisor is to help minimize the negative impact of estate taxes for a family and a surviving spouse dealing with the loss of a loved one.

Terry Ritchie is the Director of Cross-Border Wealth Services at the Cardinal Point, a cross-border wealth management organization with offices in the United States and Canada.  Terry has been providing Canada-U.S. cross-border financial, investment, tax, transition, and estate planning services to affluent families for over 25 years.  He is active as an author, speaker and educator on international tax and financial planning matters. www.cardinalpointwealth.com

A checklist for U.S.-bound snowbird clients

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In the second part of this two-part series on advising snowbird clients, Terry Ritchie of Cardinal Point looks at four important items that should be on a snowbird’s checklist as they prepare to head south for the winter. First, get familiar with the residency requirements for healthcare benefits in your jurisdiction; some require specific minimum periods to be eligible for publicly funded health care when in Canada. Second, snowbirds should travel with a “border kit” that serves as proof that you’re a Canadian tax resident (click on the article link for specific documents to include).

Third, Ritchie warns against attempting to time the currency market when converting cash. If you plan to make the cross-border lifestyle a long-term situation, make sure you have U.S. dollars hedged for that purpose. Finally, review your estate planning situation, as Canadians who die owning more than $60K in U.S. real estate and securities held personally require the executor to file a U.S. estate tax return.

Got Snowbirds? Check These Tax Changes

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In this article, Cardinal Point’s Terry Ritchie looks at new tax changes that took effect on October 31. The IRS released inflation adjustments for more than 40 tax provisions, including the 2014 tax rate schedules and other rates, exemptions and changes. In particular, advisors with U.S. citizens as clients, or those who help Canadian clients who own U.S. property/shares, should look at the U.S. estate tax exemption for 2014.

How U.S. Estate Tax Applies to Canadians with U.S. Stocks, ETFs

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Cardinal Point’s Terry Ritchie continues his talk with Rob Carrick about U.S. estate taxes; this segment focuses on what they mean to Canadians who own U.S. stocks and ETFs. U.S. shares owned by Canadians are considered U.S. cited, and there could be U.S. estate tax filing requirements if they are valued at more than $60K (USD) upon death. If that’s the case, a U.S. estate tax return, IRS Form 706 NA, should be filed. The problem is that the full value of the worldwide estate must be disclosed, even though the Canadian is responsible to the CRA, not the IRS. Otherwise, some transfer agents may not distribute those U.S. shares through probate.

Ritchie then discusses how much money Canadians would need in estate to worry about estate taxes. If the Canadian has less then the $5.25M exemption ($10.5 for married couples), then there is no U.S. estate tax exposure. It’s a matter of filling paperwork, but not owing taxes.

What if a Canadian owns American stock indexes listed on the TSX? It’s not an issue, but if you buy the comparable version from a U.S. provider traded on a U.S. exchange, those are considered U.S.-cited and would be part of a U.S. estate tax valuation.