U.S. estate and gift tax turmoil

Raft of new proposals creates estate-planning uncertainty

The U.S. Congress was very busy throughout the fall of 2021, and it was very challenging for advisors and their clients to keep up with a number of proposals dealing with trusts, how they are taxed and their rates of tax, other estate planning vehicles, and the U.S. gift and estate tax. A high level of anxiousness prevailed.

To recap: On Sept. 15, 2021, the House Ways and Means Committee approved the “Build Back Better Act.” It contained a number of proposals, including taxing capital gains when assets are transferred from certain trusts, curtailing many common tax-planning strategies using trusts to minimize tax in U.S. estate planning, and decreasing the U.S. lifetime exemption for gift and estate tax from US$11.7 million, to the base in 2010 of US$5 million, indexed for inflation, which would be just over US$6 million

Many of these proposals of the Committee did not survive in the bill that was passed by the House on Nov. 19, 2021. Notably, there were no changes to the estate and gift tax exemption and no changes to certain trust taxation rules that would have significantly curtailed their use.

However, the bill then went to the Senate, and on Dec. 18, 2021, the Senate adjourned. On December 19, 2021, Senator Joe Manchin III announced he could not support the bill, now putting the entire bill in jeopardy in an equally divided Senate.

As a result, high uncertainty continues with regard to what will happen next in 2022, but at least for now, it seems the high level of the current exemption, which is US$12.06 million for 2022, or US$24.12 million for a married couple, will continue, recognizing there is a sunset clause on Dec. 31, 2025, when the exemption will revert back to US$5 million indexed for inflation.

Unless Congress makes changes, the maximum rate of tax for gift and estate tax will remain at 40%.

“Use it or lose it” exemption while it is available

U.S. persons subject to U.S. gift and estate tax should as a result consider using their current US$12.06 million exemption – “use it or lose it” – while it is available. As well, they should consider making annual gifts to utilize their annual gift exemption, which for 2022 increased to US$16,000 from US$15,000 per donee. For U.S. persons making gifts to their non-U.S. citizen spouse, the limitation on gifts increases in 2022 to US$164,000.

Several of our U.S. clients who are Canadian tax residents are using their lifetime exemption in conjunction with planning to ensure their principal residence is not subject to U.S. capital gains tax. In some cases, without taking prior advice, they own their home often jointly with their Canadian spouse. Unfortunately, the U.S. tax rules do not allow for an unlimited principal residence exemption as the Canadian tax rules do.

The lifetime exemption, where appropriate based on professional tax and legal advice, can be used to transfer their ownership to their Canadian spouse, who can claim the principal residence exemption and who is not exposed to U.S. capital gains tax, in order to ensure the property is tax-free.

Some good news for Canadian with U.S. assets

The fact that the U.S. exemption remains high is very helpful for Canadians with U.S. situs assets, such as directly-owned U.S. real estate or U.S. marketable securities, and whose worldwide estate is under US$12.06 million, as they will not be exposed to U.S. estate tax under the so-called “small estate” exemption – which is not so “small”!

Given the high level of the exemption, very few estates pay any U.S. estate tax – only 1,275 in 2020. Estate planning and will planning for those with U.S. estate tax exposure is currently generally less complex as a result.

For those subject to U.S. gift and estate tax, stay tuned as 2022 plays out to see what the upshot will be. With another presidential election in 2024, there is only more uncertainty and not less with regard to what the future holds when it comes to U.S. gift and estate tax.

Margaret O’Sullivan is Managing Partner of the Toronto-based trusts and estates law firm O’Sullivan Estate Lawyers. She practices exclusively in the areas of estate planning, estate litigation, advising executors, trustees and beneficiaries, and administration of trusts and estates. This article originally appeared in the O’Sullivan Estate Lawyers blog. Used with permission.

Notes and Disclaimer

The foregoing is for general information purposes only and is the opinion of the writer. It is not intended to provide specific personalized advice on any individual situation, including, without limitation, investment, financial, legal, accounting or tax advice. Before taking any action involving your individual situation, you should seek legal advice to ensure it is appropriate to your particular circumstances.