A change in US tax rules in 2025 will slash asset values than can be transferred tax free
Canadian snowbirds heading for the sunshine of Florida or elsewhere in the US should be prepared for the sunset of a key exemption in tax rules.
Wealthy expats have enjoyed an exemption to the US federal Tax Cuts and Jobs Act (TCJA) of 2017, allowing them to pass on assets of up to US$13.61 million to their heirs tax free in 2024 ($27.22 million for a couple), but this will be expire at the end of 2025.
The so-called sunsetting of the exemption will see tax-free thresholds revert to around $6 million for individuals and $12 million for couples from January 1, 2026, with many more estates then subject to federal estate taxes levied at rates up to 45%.
Cross-border financial advisory firm Cardinal Point Wealth Management is warning Canadian high-net-worth expats to be prepared for what could mean a dramatic change to their estate planning by considering:
- Increased Tax Liability for estates that exceed the reduced thresholds. For example, an estate valued at $10 million might not face any federal estate taxes under the current exemption but could owe substantial taxes once the exemption reverts to lower levels.
- Potential Need for Plan Revisions: Estate plans set up to take advantage of the current higher exemption may no longer align with an individual's goals post-2025.
- Gifting Strategies: Individuals may now consider transferring wealth to heirs while the higher exemption remains in effect.
- Trust Considerations: Trusts are often key components in managing estate taxes and ensuring smooth wealth transfer to future generations.
There is a chance that Congress will decide not to sunset the exemption depending on the outcome of the presidential election in November, but BlackRock’s Lincoln Fleming says that investors should not hold out for a maybe.
“Investors who proactively plan for a potential sunset will likely have more flexibility and planning optionality than those who passively take a “wait and see” approach,” Fleming wrote in an article.
