LIFESTYLE

Cross-Border Executor Challenges

Gain from our insights on the issues that families regularly face. Discover what to consider when choosing a long-distance executor.

11.03.2020 - Fiduciary Trust Canada

It is simply a fact of life today—families are spread around the world. Though digital tools help keep relationships close, the realities of cross-border living hit home when parents consider naming a child, living beyond our borders, as executor of their estate. There are also weighty implications for the person who dutifully says yes to assuming such responsibilities.

From a cross-Canada legal perspective, nothing prohibits you from appointing a foreign executor for your estate. In our view, the real questions are: Is it a good idea? Or, if you have no choice, how can you make it work better?

To help illustrate some considerations, meet our fictional Canadian family, Daryl and Debbie and their two adult sons. Ben holds US/Canada dual citizenship and lives in California with his family. Doug is single and travels constantly. He is a free spirit and his parents worry about him saving for retirement. Given his good head for business, Daryl and Debbie appoint Ben as executor.

The couple’s estate consists of their principal residence in Alberta, registered and non-registered investment accounts and some bank accounts. Daryl predeceases his wife. When Debbie dies, Ben steps in as executor and discovers her will says the estate is to be divided equally between the two brothers. It also stipulates that one-half of Doug’s share be held in trust to protect his future financial security. Ben is named as trustee of Doug’s trust.

The Logistics Of It All

Ben and Doug come back to Alberta for their mother’s funeral and Ben quickly realizes some things are best addressed while in the community, for instance, selling Debbie’s car, distributing all the belongings and arranging house maintenance until its potential sale. Doug is unclear about returning to Alberta and whether he wants to take the family house as part of his estate share, so decisions are on hold.

Ben starts running into time-consuming issues when he visits Debbie’s bank to open the necessary estate account that will let him pay ongoing estate expenses. Since he is a non-resident, there are additional complexities to opening the account and getting that done takes longer than expected.

Realistically, Ben has to go home to his family and job. Once back in California, he and his employer reach an agreement that says Ben can visit Alberta a few days each month for executor purposes. Ben plans to carefully track his travel expenses, charging them to the estate. At the same time, he begins gathering estate information and, like many executors, discovers the process involves hours on the phone and writing letters to various agencies. However, given technology, Ben spends the majority of time working on estate matters from his California home.

What Bond Requirement?

The estate lawyer advises that when applying to probate Debbie’s estate, the court will require Ben to provide a surety bond since he lives outside of Alberta and, of even more concern, outside of Canada.1 The bond’s purpose is to guarantee that the estate’s value is safe, even if Ben fails to perform his executor duties. To obtain the bond, Ben must disclose detailed information about his assets and income. He will pay an annual premium, which could cost several thousand dollars. Ben and his lawyer contact three insurance companies before they find one willing to issue the bond.

The bond requirement can be waived in some circumstances, but it requires a special court application, involving additional legal expense. The court reviews all the facts, including whether all beneficiaries agree to the step. Unfortunately, Doug is disappointed and hurt that Ben has been appointed trustee of one-half of his estate share and refuses to waive the bond.

Where Exactly Does The Estate Reside?

Under Canada’s Income Tax Act, an estate is considered a trust and is therefore a taxpayer. The tax residence of a trust is assumed to be wherever central control and management of the estate resides. In Ben’s case, it is California. This means the estate will likely be treated as a US resident and prompts several consequences:2

  • The estate could lose the preferred tax treatment of capital gains and dividends enjoyed as a Canadian resident estate;
  • The estate may be unable to split the tax burden between the estate and beneficiaries as it would if resident in Canada;
  • There will be Canadian income tax withheld at source on Canadian sourced income. If the family home is sold, the buyer must withhold and remit a portion of the purchase price to the Canada Revenue Agency;
  • On the date the estate becomes non-resident, there will be a deemed disposition of all estate assets, possibly triggering additional taxable capital gains;
  • The estate will be subject to the tax laws of the United States and California, where Ben resides.  Ben will need to file additional US tax returns and may face penalties if he fails to do so; and,
  • In the worst case, the estate could be factually resident in the United States, but “deemed resident” by Canada, which could result in double taxation.

To establish a Canadian residence for the estate, Ben would have to make all estate-related decisions in Canada. Since the estate will likely take 12 to 18 months to settle and his family and work are in California, this is not feasible.

Once the estate is settled, Ben will begin acting as trustee for Doug’s trust, which will almost certainly be considered resident in the United States given Ben’s life there. Having a US trust for Doug, who might one day return to Canada, may not be the best arrangement for him. Things are probably not unfolding as Daryl and Debbie intended.

Advisor Restrictions

Debbie’s will instructs Ben to engage the Alberta-based financial advisor, who did an excellent job managing their family’s money for years, to take care of Doug’s trust investments. However, the advisor is prohibited by US security laws from providing any investment advice to a US resident. Ben will be unable to work with a Canadian investment advisor as long as he is trustee of Doug’s trust and lives in the United States.3

Know The Available Avenues

With all of this in mind, is it a good idea to appoint a foreign executor of a Canadian estate? In our experience the answer is, probably not. Here are some thoughts we would share with parents like Debbie and Daryl, or clients whose only option is a child who lives beyond Canada’s borders:

  • Discuss the situation with Ben and Doug. Perhaps Doug would relocate to Canada for one to two years to act as the estate executor, ensuring it resides in Canada. He could obtain Ben’s advice and help informally;  
  • Appoint a co-executor in Canada to work with Ben. All decisions would be made jointly, originating from within Canada. Both executors must be diligent about documenting all meetings and signing important documents in a way that shows Ben does not control the estate from the United States; and,
  • Appoint a Canadian trust company, such as Fiduciary Trust Canada, as executor. This ensures the estate resides in Canada, and since trust companies do not have to post a surety bond, eliminates that costly requirement. Ben could be appointed as co-executor and trustee and participate in decisions. The trust company will have the expertise to ensure the estate and Doug’s trust are clearly managed in Canada. 

Given our experience with clients, we know the same concerns work in reverse—where Canadian adults have parents living in other countries. Whatever your family structure may be, whichever countries your family may call home, talking about estate planning, learning the “laws of the land” and seeking expert advice will surely help address the cross-border conundrum before it emerges.

 

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FOOTNOTES:

1.The bond requirement for extra-provincial executors exists in all provinces except Quebec. The court will be reluctant to dispense with a bond when the executor resides outside Canada because the court does not have jurisdiction over the executor.
2.This information is not intended as tax advice. Cross-border taxation is a complicated topic and current advice from an experienced tax expert is always recommended.
3.Some Canadian investment advisors may be licensed to provide investment advice in California, but it would be a rare circumstance.

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