Strategies for avoiding hefty US estate tax?

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ETA
Posts: 12
Joined: Thu Oct 28, 2004 10:25 am

Strategies for avoiding hefty US estate tax?

Post by ETA »

Apologies if this has already been discussed (I didn't find anything in over 1 hour of looking) and hello to Nelsona and the rest of the gang here -- it's been a while ;).

My parents are Canadian citizens / residents who own a condo in Florida and they've recently become aware of the heavy tax penalty that their estate could incur should they (to be blunt) die while still owning that property. As far as I know the rule is "if a deceased's worldwide estate is worth more than 2M the property could be taxed (by the IRS) at 45%". The 2M number seems to be somewhat maleable at this point -- it jumps to 3.5M in 2009, there's *no* estate tax (?) in 2010 then the number is 1M from 2011 onwards unless the law is changed.

Questions (sorry if these are a bit long -- trying to summarize what I've found out about this so far):

#1 What are some possible strategies that they could use to minimize this tax?

#1a: One approach which I've come across suggests splitting worldwide holdings between my parents so that if the US property holder passes then that person's worldwide holdings would be below the threshold. What would happen then? Would the idea then be to sell the property before the other parent dies to avoid the estate tax altogether? Either way, they'd still be SOL if they both died at the same time, right?

#1b: Is another strategy for them to try to make sure that their worldwide holdings are < the threshold (that could be hard if the threshold drops to 1M given that the condo itself could be worth that)...?

#1c: Sell the condo, rent one instead?

#2 Any information at this point on whether the threshold might jump back to 3.5M+ after 2011, or is that a complete unknown at this point.

#3 My sisters are Canadians living in Canada while I'm a Canadian green card holder living in the US. Are there any special tax consequences for any of us as far as inheritance from my parents goes? I've read the gift tax threads and it sounds like any burden would be on my parents not on the children receiving the gift with the exception of directly inheriting things like stocks and property and such in which case we'd have to deal with the book value of those where applicable?

#4 I live in MA -- any issues tied to that by any chance?

#5 Is that 45% figure somehow scaled (e.g. based on how far over the threshold the worldwide holdings are)? If not, it would really suck for someone to be $0.01 over the limit...

#6 Is that tax on top of tax on any capital gains since the condo is a vacation home?

As always, thanks for the valuable advice given here!

ETA
nelsona
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Post by nelsona »

I won't answer your question directly, but I will point these facts out:

1. as you say, your parents estate will be on the hook for any estate tax, not the heirs, regardless of where the heirs live.

2. Only their US holdings would be subject to estate tax

3. Any Cdn tax triggered by their death (like cap gains on the condo) would be used to write off against any estate tax.


As to the future of estate tax, its too unpredictable right now.

There are a couple of 'snowbird' books out there that go into detail about this issue.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
ETA
Posts: 12
Joined: Thu Oct 28, 2004 10:25 am

Post by ETA »

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