TITLE CONCERNS. Transferring funds to purchase a home or condominium is a simple process for Canadian buyers, however, many foreign buyers often overlook the consequences of their purchase. The acquisition of U.S. real estate by a Canadian citizens poses significant issues including but not limited to U.S. estate tax, capital gains tax, incapacity issues, complex Florida probate rules and creditor protection issues. Proper cross-border planning for Canadian Citizens must address all of these issues. A deep analysis is required to find the best solution. There is no simple answer or one size fits all. However, as a general rule, the vast majority of concerns can best be addressed by creating and taking title in a Canadian Florida Land Trust which is considerably more advantageous then owning property in a buyer’s individual or corporate name or even a Canadian Trust.
INTRODUCING THE FLORIDA LAND TRUST. This vehicle often referred to as an “Illinois Land Trust” because of its origin is a unique legal entity. This form of ownership is unfamiliar to most U.S. Lawyers and tax advisors due to the fact that Illinois and Florida are the only states that have a specific nearly identical land trust statute. This form of ownership is so far removed from classic trust law that calling it a trust can be misleading. The land trust is very versatile and differs from conventional trusts in many ways.
A land trust is a legal arrangement whereby the trustee holds legal title to the property, yet all ownership interest in the property lies with the beneficial owners of the trust. The trustee takes action, solely upon the direction of the beneficiaries. Among countless list of benefits to holding property in a Florida Land Trust is:
· The interest of the beneficiaries are not disclosed except upon choice, upon sale or upon order of the court.
· The beneficial shares of the trust are deemed personal property only in accordance with Florida Statute 689.071(6).
· Provisions can be made in cases of disability which negate guardianship proceedings which otherwise may be required.
· It serves as a substitute for a will and provides planning providing direction for distributing the property upon death.
· It can serve as a substitute for a partnership agreement and outline the various partners rights and interest in the property.
· Transferring interest within a land trust is simple and not subject to state imposed documentary transfer tax.
· In the event of sale, provided the property has been held for one year or longer, favorable individual capital gain rates apply rather than the higher corporate rates.
· When creating the land trust you can determine who will serve as trustee. Typically, in a Canadian Florida Land Trust this is the owner, though it does not need to be. Trustees serve a ministerial role as the beneficiaries direct the trustee on how they wish to manage the property. Trustees are the individuals whose name is made public and is the individual who signs deeds or mortgages at the direction of the beneficial owners. Successor Trustees can be listed and set forth in the event of death or incapacity of the initial trustee.
A FLORIDA LAND TRUST AVOIDS COMMON PITFALLS.
1. PROBATE. Although a will, valid in Canada, will be recognized in Florida, unfortunately the will is not exempt from the costly and time consuming complicated probate process to transfer title in Florida. A Canadian Florida Land Trust can be created at the time of purchase and title can be placed in the name of the trust. Should the property owner pass away, provided title has been placed in the land trust, probate and related expenses will be avoided. Even though the property owner passed away, the land trust continues and the provisions within the trust set forth the order of the contingent beneficiaries (typically the surviving spouse and then the children).
2. INCAPACITY. Another advantage of Canadian Florida Land Trust is that it not only avoids probate and seeks to marginalize estate tax but it also acts as an excellent tool in the event of incapacity. If the property owner becomes incapacitated mentally or otherwise provisions are contained within the trust to provide for successor trustee(s) thereby avoiding the timely and costly process of Florida guardianship proceedings.
3. CREDITOR PROTECTION. Unlike owning property in your individual name, the interest of the beneficiaries do not need to be made public in a Canadian Florida Land Trust. As a result, third party creditors cannot place a lien or seize the property as it remains confidential who the true owner is.
4. ESTATE TAX CONCERNS. Estate taxes are of paramount concern when Canadians own property in the U.S.
A. Under the present tax treaty Canadians are taxed in the United States upon their worldwide assets. As of January 1, 2013 this exemption was permanently set at five million dollar based upon worldwide assets. The Canadian citizen is then taxed on the value of their United States property in proportion to the value of all assets held. As a result, if title is held in an individual name and the worldwide assets exceed the present exemption amount, the surviving spouse may be hit with a significant estate tax that climbs all the way up to 45% based on the value of the estate. If properly drafted, shares within the land trust not need to be revealed until the time of death thereby making it possible to artfully manipulate the reported property interest of the deceased and hopefully avoid estate tax.
B. Another tool to avoid or minimize estate tax is to make children beneficiaries at the time of purchase thereby increasing the tax exemption amount by increasing the number of individuals possessing an interest in the land trust. There is no gift tax in Canada. If the funds are gifted to the children in Canada and transferred for closing there is no taxable event. However, if the property is located in the United States, a subsequent transfer of property to children will trigger a gift tax owed to the U.S.
C. Yet another technique to reduce exposure to the U.S. estate tax is to split interest ownership within the Land Trust. Under such an arrangement, an individual may acquire a life interest in the land trust share and his children could acquire the remainder interest in the property. Upon the death of the individual, there would be no estate tax on the life interest, since the life interest would have no value upon death. However one caveat: Should the children die while holding a remainder interest, the estate tax would be assessed on the value of the remainder interest. As a practical matter, children can obtain term life insurance at lower costs (due to their age) to protect them from estate tax exposure.
5. FLEXIBILITY. Most of all, land trusts create broad flexibility. Notwithstanding the fact that the real property subject to the land trust is located in the State of Florida, said interest in the Land Trust is considered intangible personal property. The situs of said shares are deemed to be in Canada where the beneficiaries reside. Absent any indication to the contrary, any shares transferred among beneficiaries shall be deemed to have occurred in Canada where the beneficiaries reside and shall be exempt and not subject to U.S. Gift Tax as a transfer of intangible property in accordance with I.R.C. 2501(A)(2).
As a result, if set up properly and if shares are gifted and held in escrow by your children it is possible to completely avoid probate, avoid estate tax, not run afoul of our gift tax laws and upon death, have your heirs take over the original basis you had in the property for capital gains purposes when they ultimately sell the property.
LESS FAVORABLE ALTERNATIVES
Other options to owning real estate individually is to take title in a Canadian corporation or to create a Canadian trust sometimes referred to as a Cross Border Trust. Below is an overview of both.
OWNERSHIP BY A CANADIAN CORPORATION: In years past Canadian corporations were frequently used to own U.S. property. The corporation, if properly structured, was considered to eliminate U.S. estate tax on the death of the shareholder and the shareholder benefit issues did not arise due to an administrative provision of Canada Revenue. This type of corporation was referred to as a single purpose corporation. However, Canada Revenue withdrew this policy effective January 1, 2005. As a result a taxable shareholder benefit is created if the property held by a corporation was made available for the personal use of the shareholder.
The value of the taxable benefit is determined by either, the fair market rent approach or the imputed rent approach. Under the fair market rent approach the taxable benefit will be the fair market value rent for the property less any consideration paid by the shareholder to the corporation for the use of the property. Under the imputed rent approach, the taxable benefit is calculated by the greater of the cost and the fair market value of the property X the Canada Revenue Agency’s prescribed interest rate, the operating costs related to the property paid by the corporation, less any consideration paid by the shareholders for the use of the property. As a result, it is no longer desirable to own property intended for personal use inside a Canadian corporation.
OWNERSHIP BY A CANADIAN TRUST. A Canadian trust many times referred to as a “cross Border Trust” may also be used to own a U.S. property. If properly established, the trust may avoid exposure to U.S. estate tax however, unlike a Florida Land Trust which is revocable, to achieve it’s goal the cross border trust must be irrevocable. In fact, the trust must be set up before the purchase of the U.S. property and the person who provides the funds to the trust for the purchase cannot be a trustee or a beneficiary of the trust. The most common structure is where one spouse creates the trust (the grantor) while the other spouse and their children are named the beneficiaries of the trust. The grantor’s spouse and their children can then use the property rent-free during their lifetimes. The property held by the trust would not be included the grantor’s estate for U.S. estate tax purposes, nor will it be included in the spouse’s estate for U.S. estate tax purposes on his or her death.
Using a Canadian trust to own U.S. property does have its disadvantages. If the grantor’s spouse predeceases the grantor, the grantor must pay fair market value rent to the trust for the property to be excluded from his or her estate for U.S. estate tax purposes. The only potential benefit that may result in creating a “Cross Border Canadian Trust” is that special wording may be put in the trust to preserve foreign credits in Canada under the Canada/U.S. tax treaty regarding capital gains tax. If properly structured, the seller may receive credit for the 15% United States I.R.S. Capital Gains Tax upon sale which otherwise would not be possible. However, in my opinion, this potential benefit is pale in comparison to the potential estate tax which could otherwise be due if the wrong spouse dies first. This concern combined with a lack of flexibility makes a Florida Land Trust more attractive.
GET IT RIGHT THE FIRST TIME
This means when purchasing property you need to title it correctly from the outset. If a decision is made to transfer the real property at a later date, Revenue Canada requires the value to be determined at the time of transfer to see if capital gain applies. Further, when a foreign investor transfers existing U.S. real estate by gift, he or she will be subject to U.S. gift tax. Again, this is the case even where an estate and gift tax treaty applies. There is no gift tax credit available to a transferor who is neither a citizen of nor resident in the United States (other than a limited annual exclusion of $13,000.00).
Interestingly, a Land Trust considers the gifting of shares to have occurred where the beneficiaries reside and outside the purview of U.S. Tax Gift Laws. Otherwise, title held outside a land trust which is gifted outright is subject to the gift tax of the fair market value would apply which is the same graduated rate that applies to estate tax.
At the end of the day, there may be unique facts and circumstances particular to your case that may warrant further investigation. As indicated above when it comes to proper planning there is no panacea or one size fits all, however, most common pitfalls can be avoided and countless benefits obtained by getting it right the first time by establishing a Canadian Florida Land Trust at the time of purchasing property
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