Estate tax liabilities when you’re a non-U.S. citizen

Spring has sprung, and this month we have answers to two questions for you to ponder as you enjoy the warmer weather!

I am a Canadian citizen living in New York. I have heard that estate taxes for non-US citizens can be much greater. What is my estate tax liability as a Canadian?

For U.S. citizens or U.S. residents (both of which are referred to in this summary as “U.S. residents”), the current exemption from federal estate tax is $5.49 million per person for 2017. The federal exemption increases slightly every year for a cost of living adjustment. A resident for estate tax purposes is someone who resides in the United States for the long-term. For estate tax purposes, it is defined as follows: “A person acquires a domicile in a place by living there, for even a brief period of time, with no definite present intention of later removing therefrom. Residence without the requisite intention to remain indefinitely will not suffice to constitute domicile, nor will intention to change domicile effect such a change unless accompanied by actual removal.”

If you are in the US on a contract basis with a specific and planned end-date to return to your country, you are not considered a U.S. resident. People who are non-U.S. citizens and non-U.S. residents are subject to estate taxes for any assets in the U.S. that exceed $60,000. “U.S. assets” include any real property within the U.S., any U.S. bank accounts and U.S.-based stocks and securities, whether the account is held in or outside of the U.S. Life insurance policies are not considered U.S. assets.

Also, non-U.S. residents cannot take advantage of a marital deduction and the whole of any joint asset is included in the predeceased spouse’s estate (as opposed to only 50 percent inclusion for a U.S. resident).

However, the U.S. has tax treaties with many countries that override these rules, including with Canada. The U.S.–Canada tax treaty allows Canadian residents to take advantage of the federal exclusion amount ($5.49 million for 2017). If, like many people, you are a Canadian citizen and non-U.S. resident at the time of your death, the Executor of your estate will need to file a specific form to take advantage of this (IRS Forms 706-NA and 8833).

For New York State, under a change in the law effective April 1, 2017, the exemption is $5.25 million per person and will increase each year until it matches the federal exemption in 2019. If you are a New York resident, an estate tax return must be filed if you are over the exclusion amount. You receive a deduction for any assets that are not New York assets. If you are not a New York resident but have assets in New York, you will only need to file a New York estate tax return if the assets in New York are over the exclusion amount.

If you are concerned about estate taxes, you should consult an attorney and accountant to better understand your estate tax liability based on your assets and the tax laws affecting you.

I opened an Uniform Transfer to Minors Act account for my child when she was young and now she is about to turn 18 years old, and I am concerned about turning over the account to her, which now has more than $50,000.

Many parents open bank accounts pursuant to the Uniform Transfer to Minors Act when their children are young in order to save monetary gifts from grandparents, or to save for the children’s future college expenses. However, many parents do not realize that when the child turns 18, he or she is entitled to possession and control over that money, and can use it in whatever way he or she desires. The law does not require that the child use that money for college, but requires that it must be turned over to the child when that child turns 18 years old. In some cases, the account does not turn over to the child until he is 21 years old. The title of the account should indicate whether the account is held until age 18 or 21.

New York law provides that a transfer made pursuant to the act is irrevocable and the custodial property is vested in the minor child at the time of transfer. As custodian of the account, you are obligated to inform the minor of those assets at the time the account completely vests in the minor. The statute does, however, state that the custodian “shall transfer in an appropriate manner the custodial property to the minor,” which provides some options for steps you may take if you are concerned about turning over a large account to your child:

Use the funds for the minor’s benefit

Until the minor is 18, you can use the funds for his benefit. If you are also the parent of the minor, you may not use funds for items that are part of your existing support obligations to your child (such as food, clothing and shelter), but you may use the account to pay for “luxuries” such as private school, extracurricular activities, camp, or a new computer.

Transfer the assets to the minor

When the minor is 18, you can retitle the account into an account in his name. You can, with the minor’s permission, be named a co-signer or receive duplicate statements to see how the minor spends the money. You may incentivize your child to use the funds responsibly by stating that you will pay for college with other funds if she keeps the funds for graduate school (as one example) or you may even use “strong-arm” tactics to state that you will reduce her inheritance if she uses the funds irresponsibly.

Purchase an
income-producing asset

You can use your discretion under “appropriate manner” to use the funds to purchase an asset that the minor would not be able to easily liquidate once she receives it at age 18, such as income-producing real property or an annuity. This is not recommended because it could be later reviewed as a breach of fiduciary duty. Fiduciary obligations include that a fiduciary must transfer assets to a beneficiary upon the termination of a fiduciary duty in a manner that is easily converted to cash. If, however, the minor consents in writing, this may help protect against a later claim.

529 Plan

You may transfer the account proceeds into a newly created 529 Plan for the minor’s benefit. This will require liquidating any stocks or securities in the account because a 529 Plan can only be funded with cash. This may trigger capital gains taxes if the assets have increased in value significantly.

However, transferring the funds to a 529 Plan will allow you to continue to be the custodian of the funds until the funds are completely withdrawn, thereby allowing you to withhold it to pay for college. But, if your child requests the funds at any time for any purpose, you will need to release the funds or she may petition the court to receive the funds pursuant to your obligation as fiduciary of the account since you used those assets to fund the 529 Plan.

2503(c) Trust

If you want to continue to hold the funds, you could create a living trust for the minor’s benefit under Internal Revenue Code § 2503(c). The terms of the trust can be drafted to allow you, as Trustee, to make discretionary distributions and forced distributions at set ages, so the funds stay under your control until you believe your child is able to handle the account on her own.

In order to deter future claims of breach of fiduciary duty, the trust should allow the minor a one-time withdrawal right, where she is afforded the opportunity to withdraw the funds up to the full amount when she turns 18 years old. Your child will have a 30- or 60-day window to do so.

If she does not exercise her withdrawal right, the funds stay in trust pursuant to the trust agreement. If your child does not exercise her right of withdrawal, the trust would then be considered a “self-settled” trust and any creditor of your child could potentially reach the funds to satisfy a judgment. If instead of setting up a new trust you keep the funds in the account after your child becomes 18, she could demand the funds at any time. As discussed above, you can try to incentivize your child to not exercise her right of withdrawal in your discussions with her.

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Each situation is different and fact specific, and whether a particular option is right for you depends on your particular situation. If you have or are considering an account and are concerned about turning over the account to your child when she turns 18 or 21, you should speak to an attorney to discuss your options and which option is best for your situation.

Alison Arden Besunder is the founding attorney of the law firm of Arden Besunder P.C., where she assists new and not-so-new parents with their estate planning needs. Her firm assists clients in Manhattan, Brooklyn, Queens, Nassau, and Suffolk Counties. You can find Alison Besunder on Twitter @estatetrustplan and on her website at