Beware of choosing a U.S. resident as the executor* of your will
The global reach of our economy has provided increased opportunities for individuals to work and study outside of Canada. Adult children may move to other countries to gain experience, launch their professional careers and take advantage of exciting opportunities. Many Canadians also look to retire in a warmer climate, drawing them to the U.S. as a close neighbour. While this may create complexities in tax planning, an unexpected consequence may be overlooked.
When creating an estate plan, many families look to their adult relatives to act in the role of executor and trustee of their wills. Choosing a competent person for this role is critical to the smooth transition of wealth to your heirs. But what if your executor resides (or plans to reside in the future) in a foreign jurisdiction?
Clearly it will be more onerous on the executor to administer an estate from a different country, creating delays, increased travel and expenses to the estate. Even more important concerns arise when an executor is resident in the United States. Below is a summary of some of the issues to be considered.
1. Requirement to post a bond
In many Canadian jurisdictions, the law requires non-residents to post security in order to act as executor and estate trustee. We call this posting a bond. The bond provides some protection to the creditors and beneficiaries of the estate. The cost and time required for this additional step may be troublesome.
In Ontario, for example, estate law requires that a surety bond be posted if the executor is not a resident of a Commonwealth country. Since the U.S. is not part of the Commonwealth, this may be a requirement for U.S. resident executors of Canadian estates.
The executor may be able to apply to the court to dispense with the bond if there is a Canadian co-executor also appointed to act with the U.S. person or if the U.S. executor is also a major beneficiary of the estate. However, there is no guarantee that the court will agree to dispense with the bond. This extra process can cause delay and create extra cost regardless.
2. Tax residency of the estate
Having a non-resident executor may raise the issue of the tax residency of the estate if most decisions are made from another country. A trust that is non-resident of Canada may result in additional complexity and perhaps unintended tax consequences, both in Canada and in the other jurisdiction.
An estate is considered to be a trust. The tax residency of a trust is based on where the control and management of the trust occurs. If you only have 2 trustees and one is non-resident, it would be much more difficult to prove where the control resides. Typically with 2 trustees, they must act together/jointly in their decisions.
A further concern: if there is any expectation that the executor might emigrate to the U.S. or any jurisdiction outside of Canada after the date of death and during their administration of the estate, the trust will become a non-resident of Canada. Tax consequences associated with the emigration of the trust will apply such as a deemed disposition and reacquisition of each property of the trust at fair market value. This will result in additional taxes to the estate.
3. U.S. reporting obligations
U.S. disclosure requirements add complexity because the U.S. executor has obligations to file certain information returns with U.S. government authorities and there are substantial penalties for non-filing. This may also be of concern to your executor if he or she wants privacy from the peering eyes of the U.S. government.
4. Investment management concerns
Regulatory authorities in the investment industry are very strict about trading activity in relation to jurisdictional issues. A Canadian investment advisor may not able to accept investment instructions from a U.S. resident.
Often an individual will indicate in the will their wish for the executor and estate trustee to continue to obtain trusted advice from their existing investment advisor. This may not be possible if the executor/trustee resides in the U.S.
Keep in mind that the issues described above are not alleviated by virtue of the executor’s citizenship. While the executor may continue to hold a Canadian passport and/or dual citizenship with Canada and the U.S., it is the executor’s residency that creates the issue.
Careful consideration is required when choosing your executor and estate trustee. Consult with a professional estate lawyer to ensure the smooth transition of your wealth to the next generation.
* Liquidator in Quebec.