The basics: U.S. estate tax for non-residents
The U.S. imposes estate taxes on the worldwide estates of its citizens and residents. However, as a Canadian with no U.S. assets, you might initially assume that U.S. estate taxes do not apply to you. The catch here is that since your daughter is a U.S. permanent resident, her inheritance from your estate may generally not be taxable in the United States; however, there may be other tax and filing considerations to keep in mind. Let’s explore them together, Gail.
U.S. estate tax thresholds and exemptions
Currently, the U.S. federal estate tax exemption is quite high, sitting at $13.61 million per individual as of 2024. (All figures are in U.S. dollars.) This means that estates valued below this threshold are not subject to federal estate taxes. Assuming that your estate’s value is under $13.61 million, no federal estate tax would be due. For instance, if your Canadian estate is valued at $3 million, it is well below the $13.61-million U.S. federal estate tax exemption. Therefore, your daughter would not be liable for U.S. federal estate taxes on her inheritance.
State estate taxes
While the federal estate tax exemption is high, it’s important to consider that some U.S. states impose their own estate or inheritance taxes with lower exemption thresholds. The impact of these state taxes depends on where your daughter resides. As of 2024, the states of Washington, Oregon, Minnesota, Illinois, Maryland, Vermont, Connecticut, New York, Rhode Island, Massachusetts, Maine, Hawaii and the District of Columbia impose estate taxes. This means residents of these states might face both federal and state estate taxes, depending on the total value of the assets.
Estate tax thresholds in these states range from $1 million in Oregon to $13.61 million in Connecticut, and tax rates vary. I would recommend that your daughter check her state’s website for specific details on potential estate taxes, Gail.
Financial management and currency exchange
Managing a cross-border inheritance often means dealing with multiple currencies. When preparing your estate plan, Gail, you will want to keep in mind some key points that your future executor will come across when distributing your estate to your daughter:
Currency exchange rates: Fluctuations in exchange rates can affect the value of the inheritance when converting from Canadian to U.S. dollars. For instance, if the Canadian dollar weakens against the U.S. dollar between the time of inheritance and the time of transfer, the value of the inheritance in U.S. dollars could decrease.
Banking and investments: Transferring funds and managing investments across borders may incur extra fees and require dealing with different financial institutions. For example, transferring funds from a Canadian brokerage account to a U.S. account might involve transaction fees, wire fees and foreign exchange fees.
Cross-border legal challenges
Handling a will with cross-border implications requires careful legal navigation. Key issues include:
Recognition of wills: Canadian wills are generally recognized in the U.S., but differences in probate laws can complicate the process. Legal advice in both countries is often necessary. For instance, if a beneficiary wants to sell an inherited Canadian property, they may need to follow both Canadian and U.S. legal procedures.
Asset transfer: Transferring assets like real estate or investments across borders may involve additional legal and regulatory steps. For example, transferring a Canadian investment account to a U.S. beneficiary might require navigating both Canadian banking regulations and U.S. tax reporting requirements.
Practical steps for cross-border estate planning
To ensure a smooth transfer of your estate to your U.S. resident daughter, Gail, consider the following practical steps:
Consult with experts: Engage with a cross-border estate planning specialist who understands both Canadian and U.S. tax laws. These professionals have the expertise needed to navigate the complex rules and regulations involved in cross-border inheritances. They can help ensure that your estate plan minimizes taxes, avoids legal pitfalls, and complies with the laws in both countries, making the transfer of your assets as smooth as possible.
Update your will: Make sure your will is current and clearly outlines your wishes. Specify exactly how you want your assets to be distributed, and think about any cross-border issues that might come up. This will help ensure that everything goes according to your plans when the time comes.
Consider trusts: Establishing a trust can be a smart way to manage and transfer your assets. A trust is a legal arrangement where a trustee holds and manages your assets for the benefit of your chosen beneficiaries. By setting up a trust, you can ensure that your estate is managed efficiently, tax-effectively and according to your precise wishes. Consulting with a cross-border estate planning specialist can help you determine the best trust structure for your situation.
Stay informed: Tax laws and regulations can change frequently, impacting how your estate is taxed and managed. To maintain the effectiveness of your estate plan, schedule regular reviews with a cross-border estate planning specialist. This proactive approach ensures that your plan remains up-to-date, legally compliant and optimized for tax efficiency, ultimately protecting your legacy and providing peace of mind.
How to ensure a smooth transfer of your estate
As you can see, Gail, cross-border estate planning for Canadian parents with U.S. resident children involves navigating complex tax regulations and potential pitfalls. While your estate may be valued under the federal threshold and might not face U.S. federal estate taxes, there are state taxes and other considerations that could impact its final value. By consulting with experts, updating your will, considering trusts and staying informed, you can ensure a smooth and tax-efficient transfer of your estate to your daughter.
