US Estate Tax Planning and the Republican Tax Reform


President Trump recently achieved his first major legislative accomplishment when he signed the Tax Cuts and Jobs Act into law on December 22, 2017. One of his campaign promises had been to repeal the US federal estate tax. While the tax overhaul he signed into law didn’t go so far as to repeal the estate tax, it weakened its impact significantly by doubling the current exemption limits. Before delving into the changes, let’s briefly review the previous US federal estate tax rules that were in effect prior to the tax reform.

Previous Law (Pre-Tax Reform)

Under the previous law, individual taxpayers domiciled in the US were entitled to a lifetime exemption from US federal gift and estate tax adjusted annually to inflation from the $5 million base level set in 2011. The exemption was set to increase to $5.6 million in 2018. The tax rate was (and still is) 40% on the portion of an individual’s taxable estate that exceeds the exemption.

New Law (Post-Tax Reform)

Under the new Republican tax reform, the estate tax exemption limits are doubled: individual taxpayers now benefit from an exemption of $10 million adjusted for inflation, which amounts to $11.2 million in 2018.

It’s important to note however that these doubled exemptions are not permanent: the changes are subject to a “sunset” at the end of 2025. As of January 1, 2026, the estate tax exemption will revert to the prior level of $5 million adjusted for inflation.

Married couples can now benefit from a combined $22.4 million exemption in 2018. However, this ability of both spouses to combine their individual limits is not automatic. It depends on the use of two mechanisms described below.

US Citizen Spouses

A rule in US tax law known as the Unlimited Marital Deduction, which is similar to the Canadian spousal rollover, allows an unlimited amount of assets to be transferred to a surviving US citizen spouse free of estate tax.

A second estate tax planning benefit available between US citizen spouses is “portability,” which allows any unused exemption of the first spouse to die to be carried forward to the death of the surviving spouse.

Prior to portability, a Bypass Trust (also known as a Credit Shelter Trust) had to be used to take advantage of the first spouse’s exemption. With portability, the need for Bypass Trusts is reduced, though they still offer some important advantages, particularly in second marriage situations. Portability must be elected on a timely filed US estate tax return.

Non-US Citizen Spouses

When the surviving spouse is not a US citizen, different estate tax planning mechanisms must be contemplated. Wealthy US residents with a non-citizen spouse can’t make use of the Unlimited Marital Deduction, but they can achieve a similar result by leaving assets to their spouse via a Qualified Domestic Trust (“QDOT”). The QDOT, however, doesn’t avoid estate tax; it merely defers the payment of the tax until the surviving spouse’s death.

In most cases, a better alternative when the surviving spouse is a Canadian citizen is to make use of the marital credit allowed under the Canada-US Tax Treaty. The credit doubles the US decedent spouse’s unused exemption on assets left to a Canadian spouse, which allows for up to $22.4 million of assets to be exempted from estate tax in 2018 under the new law.

Pre-Exit Planning Required

For high net worth Canadians planning to move to the US, there are planning strategies available to prevent potential US estate tax exposure. There are opportunities to restructure one’s assets prior to a move so that they are not exposed to US estate tax upon death.

Despite President Trump’s initial campaign pledge, the estate tax is here to stay. It’s also important to remember that even under the newly doubled exemption amounts, the Democrats could eventually restore the exemption to previous or even lower levels. To discuss estate tax planning strategies, please request a consultation, and we will be happy to discuss your situation.


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MCA Cross Border Advisors, Inc. is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.