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Ian Worland - Planning for Clients with Assets in Multiple Jurisdictions

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1. PLANNING ISSUES FOR ASSETS IN MULTIPLE JURISDICTIONS Ian Worland Legacy Tax + Trust Lawyers February 15, 2005 Abbotsford Estate Planning Council 2. Introduction The…
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  • 1. PLANNING ISSUES FOR ASSETS IN MULTIPLE JURISDICTIONS Ian Worland Legacy Tax + Trust Lawyers February 15, 2005 Abbotsford Estate Planning Council
  • 2. Introduction The principal purpose of this presentation is to identify and discuss issues that arise in estate planning or administration that involve assets in multiple jurisdictions, or a testator, deceased or beneficiary in one jurisdiction with assets in another jurisdiction. Planning Issues for Assets in Multiple Jurisdict 2
  • 3. Organization - Non-Tax Considerations Estate Planning Strategies Tax Considerations for Multi-Jurisdictional Planning Foreign Tax Considerations Generally US Tax Considerations Planning Issues for Assets in Multiple Jurisdict 3
  • 4. Non-Tax Considerations Administration and Succession Conflict of Laws Grants and the Personal Representative Validity of Wills Testamentary Freedom and Conflict of Laws Probate Fees Planning Issues for Assets in Multiple Jurisdict 4
  • 5. Conflict of Laws - Domicile Jurisdiction where the person is physically living and intends to live indefinitely Domicile of origin Domicile of choice Federal v. State or Provincial domicile Planning Issues for Assets in Multiple Jurisdict 5
  • 6. Conflict of Laws – Choice of Law andVenue Which jurisdiction’s law will apply?  Nature of Assets  Domicile Which jurisdiction will have the authority to determine the matter (venue)?  Nature of Assets  Residence / location of parties, witnesses  Juridical advantage Planning Issues for Assets in Multiple Jurisdict 6
  • 7. Conflict of Laws – Nature andSitus of Assets Land including leaseholds are immoveable and situs is location B.C. Wills Act, ss. 39 – 43 (“interest in land”) All other assets are movables Chattels are situated where found at the time situs is determined Rules for movables other than chattels Planning Issues for Assets in Multiple Jurisdict 7
  • 8. Nature and Situs of Assets….continued… Wills Act, Interest in land  S. 39(1) “includes leasehold estate as well as a freehold estate in land, and any other estate or interest in land whether the estate or interest is real property or is personal property”  S. 43 “if the value of a thing that is movable consists mainly or entirely in its use in connection with particular parcel of land by owner or occupier of the land” succession under will or intestacy governed by law of situs Planning Issues for Assets in Multiple Jurisdict 8
  • 9. Non-Tax Issues – Grants and thePersonal Representative Place of Obtention Ability to use grant in multiple jurisdictions Exceptions  Corporate Statutes  US state rules Planning Issues for Assets in Multiple Jurisdict 9
  • 10. Non-Tax Issues – Validity of Wills Formal Validity Material Validity Planning Issues for Assets in Multiple Jurisdict 10
  • 11. Validity of Wills - Formal Validity Execution Requirements At Common law, domicile of death Also, Wills Act, s. 40: For movables, domicile of Testator at time of execution, domicile of origin, jurisdiction of execution For immoveables, situs governs Holograph Wills (except B.C., N.S., P.E.I.) Harmless Errors Planning Issues for Assets in Multiple Jurisdict 11
  • 12. Validity of Wills – Material Validity For movables, law of Testator’s domicile at death (Wills Act, s. 39(3)) For immoveables, law of situs (Wills Act, s. 39(2)) Perpetuity and Accumulation Period for Trusts Planning Issues for Assets in Multiple Jurisdict 12
  • 13. Validity of Wills – Miscellaneous Capacity Interpretation Trusts Planning Issues for Assets in Multiple Jurisdict 13
  • 14. Inter vivos Trusts - Moveables Formal validity and interpretation is governed by the proper law of the trust Example - Choice of law clauses and power to change the jurisdiction of the trust Administration is governed by the place of administration Planning Issues for Assets in Multiple Jurisdict 14
  • 15. Inter vivos Trusts - Immoveables Formal validity is determined by the situs Interpretation will be governed by the proper law of the trust or that intended by the Settlor Administration for immoveables uncertain situs vs. place of administration Testamentary Trusts generally governed by same conflict rules governing Wills Planning Issues for Assets in Multiple Jurisdict 15
  • 16. Trusts International Trusts Act, R.S.B.C. 1996, c. 237 (Hague Convention on the Law Applicable to Trusts and their Recognition) Conflict of Laws Rules for Trusts Act, R.S.B.C., c. 65 Planning Issues for Assets in Multiple Jurisdict 16
  • 17. Non-Tax Issues – Testamentary Freedom andConflicts of Law Dependant’s Relief Legislation (e.g. Wills Variation Act, R.S.B.C. 1996, c. 490) Family Law Legislation Saunders v. Vautier Planning Issues for Assets in Multiple Jurisdict 17
  • 18. Testamentary Freedom andConflicts of Law – Dependant’s Relief Dependant’s Relief Legislation  Rules of the Testator’s domicile will govern movables (Re Soroka (1975), 10 O.R. (2d) 638)  Rules of situs will govern immoveables (Re Pulver (1983), 13 E.T.R. 1) Planning Issues for Assets in Multiple Jurisdict 18
  • 19. Dependant’s Relief ….continued… U.S. resident owning vacation home in B.C. In the U.S. generally can disinherit an adult child B.C. resident owning vacation home in California Widow and orphans have statutory rights in some states Planning Issues for Assets in Multiple Jurisdict 19
  • 20. Testamentary Freedom andConflicts of Law - Family Law Legislation Moveable vs. Immoveable generally governs Canadian jurisdictions have deferred family property regime In B.C., triggering event does not include death Planning Issues for Assets in Multiple Jurisdict 20
  • 21. Family Law Legislation …..continued….. Many U.S. jurisdictions have separate property or community property regimes Planning Issues for Assets in Multiple Jurisdict 21
  • 22. Testamentary Freedom andConflicts of Law - Variation andTermination of Trusts Rule in Saunders v. Vautier ((1894) 49 E.R. 282) typically applies in Common Law Jurisdictions Consider Alberta, Manitoba Consider Rules in U.S. Planning Issues for Assets in Multiple Jurisdict 22
  • 23. Probate Fees Probate Fee Act, S.B.C. 1999, c. 4, as amended Re Bloom, 2004 BCSC 70 (SCBC) B.C. probate fees now apply to intangible personal property outside the Province for deceased of person ordinarily resident in B.C. at death Query constitutionality of this rule Planning to Avoid Probate Fees Planning Issues for Assets in Multiple Jurisdict 23
  • 24. Considering Conflicts of Law Rules inEstate Planning Must be considered for real estate in another jurisdiction Should be considered for movables outside of Canada Must be considered when dealing with foreign clients with assets in BC Planning Issues for Assets in Multiple Jurisdict 24
  • 25. Estate Planning Strategies Separate Situs Wills Inter Vivos Trusts Holding Corporations and other vehicles Planning Issues for Assets in Multiple Jurisdict 25
  • 26. Estate Planning Strategies -Separate Situs Wills Separate Wills that apply to assets in different jurisdictions – Example - UK Will for UK assets and BC Will for other assets Advantages may include limited probate disclosure, reduced probate fees, efficient timing, choice of law Planning Issues for Assets in Multiple Jurisdict 26
  • 27. Separate Situs Wills …continued… Disadvantage is cost e.g. Co-counsel review Considerations include:  Choice of Personal Representative  Revocation clause  Payment of Debts clause  Choice of Law clause Planning Issues for Assets in Multiple Jurisdict 27
  • 28. Estate Planning Strategies - Inter vivos trusts Potential Advantages:  Avoid Probate  May avoid succession or estate taxes  May avoid certain creditor claims (including under dependant’s relief, family law legislation)  Consolidated instrument  Choice of law Planning Issues for Assets in Multiple Jurisdict 28
  • 29. Inter vivos Trusts …continued… Potential Disadvantages:  Tax issues are complex, can be punitive  Cost Planning Issues for Assets in Multiple Jurisdict 29
  • 30. Inter vivos Trusts - TaxConsiderations Disposition on transfer 21 year rule Taxed at top rate Attribution of Income Transfer Tax Issues Planning Issues for Assets in Multiple Jurisdict 30
  • 31. Tax Considerations ...continued… Must consider foreign trust rules in Income Tax Act Must consider tax law of other jurisdiction Planning Issues for Assets in Multiple Jurisdict 31
  • 32. Tax Considerations …continued… Alter Ego Trusts available to Canadian residents Must be Canadian resident E.g. Canadian Alter Ego Trusts and the U.S. Revocable Trust Potential mismatch of foreign tax credits Planning Issues for Assets in Multiple Jurisdict 32
  • 33. Estate Planning Strategies – Holding Companies Transfer of Entire interest Transfer of Legal Title Only Tax Issues Avoidance of Probate Additional Privacy Planning Issues for Assets in Multiple Jurisdict 33
  • 34. Canadian Tax Considerations inMulti- Jurisdictional Planning Income from foreign sources Interests in non-resident trusts Canadian resident trusts and estates with non-resident beneficiaries Non-resident clients Immigration to Canada Planning Issues for Assets in Multiple Jurisdict 34
  • 35. Canadian TaxConsiderations ...continued... Interests in non-resident trusts  Ss. 94, 94.1 of the Income Tax Act Canadian trusts / estates with non-resident beneficiaries  Tax issues in beneficiary’s jurisdiction (e.g. Germany, U.S.)  Part XXII.2  Distributions of property to beneficiary  Clearance certificate issues Planning Issues for Assets in Multiple Jurisdict 35
  • 36. Canadian TaxConsiderations ...continued... Non-resident clients  Part I tax  Employed in Canada  Carried on business in Canada  Disposed of taxable Canadian property  Actual and deemed dispositions / proceeds  Part XIII Tax  Withholding rate Planning Issues for Assets in Multiple Jurisdict 36
  • 37. Canadian TaxConsiderations ...continued... Immigration to Canada  Deemed disposition and reacquisition of most property  21 year deemed disposition rule for trusts relates back to original creation Planning Issues for Assets in Multiple Jurisdict 37
  • 38. Foreign Tax Considerations Must be considered when:  Client owns property in another jurisdiction  Client is resident in another jurisdiction  Beneficiary is resident in another jurisdiction  Client or beneficiary is US citizen Once advice is obtained, consider potential relief under any relevant treaty Planning Issues for Assets in Multiple Jurisdict 38
  • 39. US Tax Considerations US Estate, Gift and Generation Skipping Transfer Taxes Estate and gift taxes apply to all U.S. citizens, regardless of residence, and residents Residency is determined with reference to domicile at time of gift or death Repeal of estate and GST taxes in 2010, subject to sunset clause Planning Issues for Assets in Multiple Jurisdict 39
  • 40. U.S. Tax Considerations …continued… Property affected:  Property owned at death  Jointly-owned assets  Life insurance proceeds  Pension plans  Transfers with retained enjoyment  Transfers conditioned upon survival  Revocable transfers Planning Issues for Assets in Multiple Jurisdict 40
  • 41. U.S. Tax Considerations – Exemptions and Rates Estate Transfer Exempt Amount (Applicable Exclusion Lifetime Gift Highest EstateYear Amount) Exempt and Gift Tax Amount Rates2005 $1.5 million $ 1 million 47%2006 $ 2 million $ 1 million 46%2007 $ 2 million $ 1 million 45%2008 $ 2 million $ 1 million 45%2009 $3.5 million $ 1 million 45%2010 Tax repealed $ 1 million 35% (gift tax)2011 $1 million $ 1 million 55% Planning Issues for Assets in Multiple Jurisdict 41
  • 42. U.S. Vacation Property … continued…Planning after repeal of the “single purpose corporation” U.S. Estate and gift tax exposure: federal & state No relief (exemptions or treaty) from gift tax Treaty credit: pro-rata amount allowed to Canadians; double credit if property transferred to spouse Treaty allows foreign tax credit in Canada for U.S. estate tax For many wealthy Canadians the Treaty relief is not enough Shares of Canadian corporation not subject to U.S. estate tax Single purpose corporation was administrative relief allowed byCRA; no shareholder benefit Property acquired after 2004; shareholder benefit assessed Planning Issues for Assets in Multiple Jurisdict 42
  • 43. U.S. Vacation Property …continued…What to do now? Calculate potential exposure Non-Recourse loan still possible Properly structured Canadian Trust for family acquires home Reverse Hybrid - Canadian partnership elects to be treated as corporation for U.S. purposes Split assets between spouses to access full U.S. exemption Split interest purchase – life interest and remainder interest Life insurance to fund liability Qualified Domestic Trust to defer U.S. estate tax Do nothing Planning Issues for Assets in Multiple Jurisdict 43
  • 44. ConclusionPlanning for clients who have assets in multiplejurisdictions or where the testator and beneficiary are indifferent jurisdictions requires a careful consideration ofthe legal and practical issues that will affect theadministration and succession of the assets, as well as thetax issues that will arise in relation to the transfer. Arrivingat a structure that addresses all of these issues while stillaccomplishing the client’s objectives without unnecessarycost or complexity can be challenging, but with the rightapproach is usually possible. Planning Issues for Assets in Multiple Jurisdict 44
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