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Follow-up to:Things you may not know about using a Cross Border TrustSM

Posted on: February 17th, 2012

By Diane Olson of the Diane Olson Team

In our continuing association with Dale Walters, he is offering a follow-up to a previous blog.

Dale Walters is a Cross Border Tax Expert and writer of Buying Real Estate in the US – The Concise Guide for Canadians and he wrote the following for my client(s).  

“On December 29th, 2011, I posted a blog entitled “Things you may not know about using a Cross Border Trust SM”.  Some of the feedback I received since that time has prompted me to update that blog to make sure that potential Canadian buyers of real estate in Arizona have all the best information possible. 

The benefits of this structure that I did mention were correct.  The Cross Border Trust SM requires no ongoing maintenance or extra tax filings, and it does avoid probate.  However, it also avoids the problem of an Arizona Guardian ship procedure that is required if the owner becomes incapacitated.  It does so by providing replacement trustees and beneficial decision makers in the event that the owner of the trust can no longer look after his or her own affairs. 

It is also true that the Cross Border Trust SM does not avoid US estate tax.  However, it does offer some estate tax benefits that I did not previously mention.  For example, this structure typically involves a division of title between two trusts where a property is owned by a couple (legal fees should be the same for one or two trusts).  The advantage gained by doing this has several facets.  Firstly, the presumption of full ownership in the first decedent is defeated.  This presumption arises from section 2040(a) of the Internal Revenue Code, and can result in a joint owner’s estate being taxed on the full value of a property as though he or she owned it alone.  Where the owners are not residents of the US, the exception for joint ownership between spouses does not apply, so Canadians need to implement their purchase with this in mind.

Secondly, with title split between two trusts, the IRS will likely accept a valuation discount when the personal representative reports the value of the property in the decedent’s estate tax return.  The discount may be approximately 20% – 30% of the value of the deceased spouse’s share of the property.  As such, with the Cross Border Trust SM structure, each spouse would be taxed on less than half the value of the US real estate, as opposed to the entire value if it were held in joint tenancy, which can save thousands of dollars in US estate tax.

Beneficiary deeds, while effective at avoiding Arizona probate, will not provide the US estate tax advantages available with a Cross Border Trust SM.  Nor would a beneficiary deed address the incapacity issue.  The latter could be solved with other legal documents, such as an enduring power of attorney, living will and healthcare surrogate designation.  However, many clients may prefer the simplicity of creating one Cross Border Trust structure, rather than having a suite of different legal documents prepared to address issues piecemeal.

Where creditor protection is a concern, more sophisticated planning is certainly required.  The relative simplicity of both beneficiary deeds and Cross Border Trusts mean that creditors can enforce claims against any of the owner’s assets.  To protect yourself against the potential claims of creditors, separate entities such as limited partnerships or corporations are required.  Corporations often have adverse tax consequences for Canadians relative to other structures, and limited partnership interests are considered probate assets.  Another option would be to hold the property in a Cross Border Irrevocable Trust, which avoids US estate tax, probate, guardianship, and creditor issues.

As you can see, there are many factors to consider, and many options to choose from.  Usually, the particular circumstances and objectives of the client determine the most appropriate structure.  Often a combination of tools is required to customize the optimal estate plan.  That is why seeking advice from a cross border professional is always advisable.”

 I highly recommend you obtain advice from a Cross-Border tax expert and any questions or concerns you have about purchasing real estate in Arizona.

Diane Olson is a former Canadian police officer whose team of agents  has earned its reputation as Canada’s go-to realtor for Canadians looking to buy vacation and investment property in Arizona.

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