United States Estate Tax in 2010

March 21, 2010 | Martin J. Rochwerg

Krystle Ng-A-Mann
Miller Thomson Toronto

Federal estate tax in the United States is in a state of flux.  US estate tax is generally applied on death at graduated rates to the value of the deceased’s estate.  For a non-resident of the US, the fair market value of US-situs property owned by such a non-resident (minus permissible deductions for debts and certain expenses) will be subject to US estate tax.

In June of 2001, legislation was enacted in the US providing for a phase-out of the tax over a period of ten years and an eventual repeal altogether by 2010.  The legislation brought about reduced estate tax rates and increased exemptions from the tax over this period. However, this legislation will sunset in 2011, so that the estate tax regime will revert to the pre-2001 rules.  Practically, this may mean that there will be a sharp decline in the exemption to $1 million and a significant increase in the maximum tax rate to 55% in 2011.  To prevent a return to lower exemptions and higher rates, Congress must pass legislation before January 1, 2011, subject to its ability to make future legislation retroactive to that date or before.

Generation-skipping transfer taxes (“GSTT”) are taxes imposed on transfers to related persons who are at least two generations younger than the transferor, and, like the estate tax, were repealed by 2010.  GSTT stands to make a reappearance in 2011 with a lower exemption and higher rate than in 2009 if new legislation is not enacted.  Note that the gift tax—levied on inter vivos gifts—carries a $1 million exemption in each of 2009, 2010 and 2011, which is not affected by the expiration of the current legislation, although the maximum gift tax rate will spike from 35% in 2010 to 55% in 2011 if new legislation is not enacted.

This uncertainty has stimulated much debate surrounding the administration of US estate tax, and unsuccessful legislative attempts have been made to address the situation.  Some would eliminate what they term the “death tax” altogether, while others would see the exemption decreased (one House Bill would have fixed the exemption permanently at $2 million, indexed for inflation), resulting in a legislative impasse.

Adding to the uncertainty is the potential retroactivity of new legislation, a matter that has been discussed in Congress.  Although the constitutionality of such an enactment is debatable and the result of a challenge is unpredictable, there is some support for upholding the government’s right to enact retroactive estate tax legislation: see the US Supreme Court case of United States v. Carlton.  Ultimately, the political nature of the decision on estate tax and GSTT for 2010 and beyond makes an accurate prediction impossible.

These developments no doubt affect Canadian residents owning property situated in the US, such as vacation homes, rental properties and even US securities, and will impact not only the quantum of US tax liability but also the manner in which property may devolve on future generations.  While the unpredictability makes estate planning more difficult, there are ways to structure gifts and other transfers to lessen the effect of future US tax policy changes.  Every estate is different, and planning is always fact-specific.  However, one of the keys to adapting to future policy changes is building flexibility into estate planning devices, allowing for adaptation where necessary.  Instruments now in existence should be carefully reviewed for terms connecting the value of gifts to the amount of US estate tax or GSTT to ensure they effectively respect the donor’s wishes and intentions.  As these matters involve a complex consideration of a host of factors, seeking professional estate planning advice is strongly suggested.

* With special thanks to Edward Northwood of Ruchelman Law Firm in New York.

2010 Federal Budget

The 2010 Federal Budget was released on March 4, 2010. For more information, please see Miller Thomson’s Budget Update at https://www.millerthomson.com/docs/Tax_Notes_March_4_2010.pdf.

 Case Update:  Frye v. Sylvestre

In our Winter 2008-09 edition of Wealth Matters, we commented on the case of Frye v. Sylvestre.  The Ontario Court of Appeal had reversed the lower court’s decision in finding a gift of shares by Will to be valid notwithstanding the share transfer restrictions in the shareholders’ agreement.  The Ontario Court of Appeal held that contractual obligations do not constrain a person’s ability to bequeath property under a Will.  The application for leave to appeal to the Supreme Court of Canada was ultimately dismissed.  Miller Thomson’s newsletter Recent Developments – Business Law in Canada (v. 3, issue 1 at https://www.millerthomson.com/index.cfm?cm=MTIssue&ce=details&primaryKey=84867#article84878) discusses the implications of this decision from a corporate law perspective.


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