Almost every year, the US estate tax regime undergoes changes on January 1. The credits and exemptions generally go up on that date. However, the credits and exemptions can at any time be reduced. In fact, the law currently in force provides for a reduction of the credits and exemptions as of January 2026. Despite that, some people are still talking about a potential repeal of the US estate tax.
But what are the 2020 rules?
Update 2020
1. US citizens
Lifetime exemption – US estate tax: US$11,580,000 (which represents a unified credit of US$4,577,800) and US$23,160,000 for a married couple.
Lifetime exemption – US gift tax: US$11,580,000.
A US citizen can make gifts to a US citizen spouse without paying any US gift tax, and without having to utilize his or her lifetime exemption.
If the spouse is not a US citizen, the US citizen may gift up to US$157,000 to the spouse without paying gift tax or using the lifetime exemption.
With respect to other beneficiaries, a US citizen may claim a US$15,000 annual gift tax exemption per beneficiary (for example, if a parent makes a gift to a child).
As some states levy an additional estate tax, US citizens living in the United States should review the rules. The exemptions granted at the state level are often lower than the federal estate tax exemption.
“Portability” of the estate tax exemption between spouses, which provides that the amount of federal estate tax exemption that a deceased spouse does not use can be transferred to the surviving spouse, remains. This exemption is commonly called DSUEA for “deceased spousal unused exclusion amount”. This provides the surviving spouse’s estate with a much larger exemption amount. As an example, if a married US citizen dies and uses US$7,580,000 of his or her estate tax exemption, the surviving spouse, provided he or she is a US citizen or resident, now has a US$15,580,000 exemption, based on 2020 figures (being $4,000,000 of unused exemption from the deceased spouse plus current exemption of $11,580,000).
Canadians living in Canada and who are not US citizens cannot benefit from portability of the estate tax exemption.
It must be noted that the use of the lifetime gift tax exemption exhausts or reduces the estate tax exemption, those two regimes being unified.
The highest estate and gift tax rate for 2020 is 40%.
2. Canadians owning US situs assets
A Canadian resident cannot claim the US$11,580,000 estate tax exemption. However, the Internal Revenue Code (IRC) provides complete relief to Canadians who own US property at death worth less than US$60,000. Moreover, under the Canada-US Income Tax Convention, Canadian residents may find tax relief by claiming a unified credit in 2020 equal to the greater of:
- US$13,000; and
- The unified credit allowed to US citizens under the IRC being US$4,577,800 for 2020 multiplied by the value of their US situs assets divided by the value of their total worldwide assets.
As a rule of thumb, using this calculation, a Canadian resident will not have to pay US estate tax provided that the value of his or her worldwide estate does not exceed US$11,580,000. A US estate tax return must, however, be filed to claim the proper credits.
Conclusion
As mentioned in my 2019 US estate tax and US gift tax update, as of January 1, 2026, the exemptions should revert to the 2017 exemptions adjusted to inflation.
Considering the fact that the increased exemptions could apply only until the end of 2025, many lawyers and tax specialists recommend to clients to take advantage of the enhanced gift tax exemption and make gifts to their children and grandchildren outright or in trust. One question that many people were asking, however, was whether significant gifts made before the gift tax exemption is reduced in 2026 could be clawed back and subject to US estate tax should the donor die after 2025, in a year when the estate tax exemption is lower than it was during the year of the gift? The IRS confirmed that it would not be the case.
Without a doubt, estate planning that takes into consideration the Canadian and US tax rules is mandatory for Canadians owning assets in both Canada and the United States and US citizens living in Canada.
Me Caroline Rhéaume, lawyer, M.fisc., TEP
January 2020