The 40% US Phantom Estate Tax - It's Real! Canadian CPAs, Lawyers, TEPs & Advisors, save your clients - and their families - unexpected financial pain if your clients pass away before it is fixed. Owning Canadian life insurance policies and TFSAs are risky and dangerous gambits for Americans, visa holders, and Canadians with US financial ties. Here’s what you need to know about the danger:
On the surface, Canadian life insurance policies look like attractive financial options. However, for individuals with US ties, these seemingly beneficial instruments may lead to unexpected financial complications that are very costly and punitive.
US tax laws are strict and unyielding. Like TFSAs, which are tax-free in Canada, the IRS does not view them as such, often leading to unforeseen tax obligations and steep penalties for US citizens, Green Card holders and Canadians with significant US financial ties.
Similarly, when a Canadian life insurance policy doesn't meet US requirements, holders could face burdensome taxes on "Phantom Income." What is Phantom Income? This is an amount not yet received by the policyholder but "have to be reported yearly to the IRS and taxed by the IRS." Moreover, for those holding US assets valued over $60,000, a possible 40% US estate tax looms.
Some might consider transferring their Canadian life insurance policy to an unqualified Canadian trust, governed under the Canadian “21 year rule,” to try to avoid US taxes. This Canadian rule deems certain types of trusts to dispose of their capital property and recognizes the accrued gains every 21 years. But caution is advised: These Canadian trusts might not qualify in the US and if the policyholder dies within three years of the transfer, the US will still claim its share of tax.
To avoid these costly pitfalls, it's prudent to consider US based financial solutions to solve US tax and estate problems. A US life insurance policy for example, held in a US Irrevocable Life Insurance Trust (ILIT), offers a more tailored safe approach for those with US connections.
In essence, for those tethered to the US, Canadian financial products demand very careful scrutiny. And for professionals - be they tax advisors, estate planners, or insurance agents - guiding clients wrongly isn't just a blunder; it may bear costly legal consequences, and impact your "Errors & Omissions" coverage.
The Hazards & Perils: It's crucial to provide precise, well-informed advice, fully understanding the intricate interplay between US and Canadian tax treaties and country specific financial, tax, estate laws and regulations. The aim is clear: Equip clients for success, avoiding unforeseen financial traps.
There are two solutions to mitigate this problem. If you are a professional advising a client that falls into this situation or if you personally have cross-border interests in the US, let's set up a complementary introductory meeting by clicking here: Calendly - Peter Merrick
If "YES" to any of the above, this section is for you: It is meant to save money, time and headaches for Trust and Estate Practitioners, legal, tax, insurance, and wealth management professionals and non-American nationals to understand if they are eligible to implement US life insurance & annuity solutions that satisfy their US cross-border requirements and needs.
If and when a non-US national needs and meets any 1 of 6 requirements, they might be eligible to purchase US life insurance and annuities to solve their US cross-border tax, wealth-transfer, inheritance and estate planning issues:
1. US Residency
2. US Bank Account
3. Marriage to a US Citizen or US Legal Resident
4. Active US Business Engagements & Interests
5. Valid US Visa
6. Owning US Real Estate
WARNING: Specifically when accessing and navigating US risk management markets, structuring and underwriting US domiciled life insurance and annuities solutions for non-US residents and non-US citizens through Section 2105 of the US Internal Revenue Code (IRC), it is absolutely essential that you partner and work with an expert very familiar with the IRS Tax Code and US/International Tax Treaties before implementing these solutions.
There are over 21,000 Society of Trust and Estate Practitioners (STEP) members in 96 countries and less than one thousand operate in the US. The Trust and Estate Practitioner designation is the global gold standard for cross-border, tax, legal, wealth management, trusts, estate, inheritance and insurance professionals working with high net worth clients that have multi-jurisdictional financial planning needs. I proudly hold the TEP.
If you are a professional advising a client that falls in this situation or if you personally have cross-border interests in the US and you want to review your insurance compliance situation, schedule a complementary introductory meeting with me by clicking here: Calendly - Peter Merrick
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