This is Part III of a three-part blog series. Parts I & II can be found at the following respective links: https://www.allaboutestates.ca/equalizing-an-estate-where-one-of-more-children-are-u-s-persons-and-planning-strategies-where-there-are-u-s-beneficiaries-part-i/ and https://www.allaboutestates.ca/equalizing-an-estate-where-one-of-more-children-are-u-s-persons-and-planning-strategies-where-there-are-u-s-beneficiaries-part-ii/.

Parts I & II discussed a few issues to consider if a client’s intention is to equalize their estate amongst their children where one or more children are U.S. Persons (such U.S. children, a “U.S. Child”). This Part III builds on Parts I & II and discusses certain possible estate planning approaches to consider, dependent on the specific facts, in circumstances where there are U.S. beneficiaries. Note that it is not legal advice and to answer the Questions in practice, I recommend obtaining U.S. tax and legal advice.

As a quick point on “U.S. Persons”, more beneficiaries than you think may be “U.S. Persons”. For example, looking again at Client and their children (as defined in Parts I & II), a “U.S. Person” may not only include a child who is a U.S. Citizen, but also a U.S. resident. So, if a child has moved to the U.S. for school and is seriously contemplating staying afterwards, Client may want to have a pre-emptive conversation about issues to consider, all within the context of answering the Questions (as defined in Parts I & II).

With respect to planning strategies where U.S. beneficiaries are involved, again I would always recommend obtaining U.S. advice. Such advice likely would include advice from US counsel specializing in tax and estate planning.

I’ll highlight two planning strategies that, dependent on the facts, may assist in Client’s planning for U.S. Child.

1. Client may wish to include a power of appointment in the dispositive provisions of their Wills. Perhaps, dependant on the facts, such power may be given to the surviving spouse to exercise. This power may include:
   • providing flexibility to determine down the road, inter alia, (a) residency of children and (b) in what manner assets could be distributed to best achieve the Equalization Intention; and
   • providing flexibility to determine at a later time, possibly closer to Client’s death, what the facts are, including Client’s children’s life stage and choices. This may impact the beneficiaries wishes and desires in respect of Client’s assets, which in turn may impact strategies to implement during Client’s lifetime or post-mortem.
2. If Client would like to implement strategies in their estate planning to help protect against U.S. estate tax that otherwise may be exigible by U.S. Child, this may impact the ability to achieve the Equalization Intention (as defined in Parts I & II). This may impact planning strategies available to deal with U.S. estate tax avoidance, including, for example, the use of these two trusts:
   • A testamentary trust for the benefit of U.S. Child that includes U.S. Person language. To avoid U.S. estate tax, sometimes planners draft Wills in such a way such that executors would distribute a share earmarked for U.S. Child to a trust for their benefit, which trust’s terms include protective wording for U.S. tax purposes. As a reminder, we would engage U.S. counsel to advise in this circumstance. They may suggest including language in such a testamentary trust that includes:
     • Limiting distributions in certain circumstances to the “HEMS standard”, meaning distributions for health, maintenance, welfare and education consistent with the recipient beneficiary’s accustomed standard of living;
     • Limiting a U.S. Person’s power of appointment, if any. For example, perhaps such power may be limited such that the U.S. Child cannot have the power to appoint to themself, their creditors, their estate, or to the creditors of their estate; and
     • Limiting, in certain circumstances, trustees’ authority to make payments in discharge of the U.S. Person’s legal obligations.

It needs to be emphasised that, while protective language may be included in trust deeds, trustees’ actions will speak for themselves as they are administering the trust. Accordingly, it is crucial for the trust to be administered in a manner that is not offside restrictions that may be intentionally included.

• • An alter ego trust, established for the benefit of Client that provides authority to the trustees of such trust to change its jurisdiction. After Client’s death, the trustees may consider changing the governing law of the trust to the U.S. as well as changing the place of management and administration to the U.S., where the trust may continue for the benefit of U.S. Child. U.S. advice, and Canadian tax advice, similarly to implementing any planning discussed beforehand, is crucial. For example, what implications would arise from changing the residency of the trust? Does certain language need to be included in the alter ego trust to protect the trust property from being deemed to be U.S. Child’s property and thereby possibly subject to U.S. estate tax once the residency of the trust changes?

As you can gather, planning in circumstances where there are U.S. beneficiaries can be complex. It is important to appreciate Client’s primary intentions and all relevant facts pertaining to their matter. This includes but is not limited to Client’s asset list and the legal and tax implications of various dispositive strategies that may be implemented to achieve their intentions. U.S. and Canadian tax and estate planning advice should be sought.