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Saturday, November 5, 2011

Estate Planning & LLPs

If you have been following this blog, you know that we settled on LLPs to hold our properties. See past posts for the reasoning and discussion of alternatives such as just relying on insurance. Others have a different view. A recent email from a blog reader (thank you) provided this link: http://www.altrolaw.com/

If you read through the material on the site, you will find reference to a book by David A. Altro called "Owning US Property The Canadian Way", and reference to an article he has published in STEP Journal: http://www.stepjournal.org/journal_archive/2011/step_journal_september_2011/southern_comfort.aspx?link=contentMiddle%20contentMiddleWide.

I have read the book as well as the article. I encourage you to read the online article which really sums up what is in the book. The main point is that owning US property personally or in an LLP leaves you open to estate taxes that can be expensive. David goes on to suggest something called a Cross Border Trust (CBT) that can help in that regard. Basically he doesn't recommend an LLP. I tried a few searches on Cross Border Trusts and did not find any independent sources, so I gather that the recommended CBT approach is a combination of other standard constructs given a name...which does not invalidate the approach.

He may have a point, and there could be merit in his CBT approach. I am telling you about it so you can reach your own conclusions. For me, I would have to engage the author directly to determine the costs and relative pros/cons of the CBT approach before reaching any conclusion. I probably will not be doing that because for our personal situation I do not believe (maybe wrongly) that the estate tax issue will be serious if one of us dies before we unwind US investments.

My basic assumption is that more complex mechanisms cost more to set up and maintain. I am much more afraid of confused tax authorities than I am of working through estate taxes. When tax authorities get confused, they can just assess whatever tax they want and it's up to you to convince them otherwise. Please do not let my conclusion (which could change) sway you. I would be very happy to hear about analysis that draws a different conclusion...if it is based on research and facts rather than fear of a general "you may be subject to costly estate tax". Please do let me know if you have investigated CBTs or other strategies and believe they are affordable and handle the estate tax risk better for average investors.

9 comments:

  1. Trusts are expensive to set up (I've heard from that author $5-7K), you can avoid probate and estate tax, i believe, by having a Canadian partnership own the limited partnership interest (a 2-tier partnership).

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  2. The CBT is sort of a "proprietary" product that Altra Law sells. As a result, I understand it is pretty expensive to set-up, and makes sense only for assets over a certain threshold value.

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  3. OK, that's pretty much what I had guessed...an expensive option.

    Not sure about the Canadian Partnership idea. I originally looked into Canadian partnerships and as I recall...at least at that time...Partnerships in Alberta were only for "Professional Partnerships". I.e. Doctors, Lawyers etc. Not for holding real estate or other partnerships. It may be different by province though.

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  4. Really useful post!

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  5. Have you looked at using a land trust (sometimes referred to as an Illinois Land Trust or Florida Land Trust) to hold title? It seems to take care of the probate/estate issue. I'm still researching the cross border issues.

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  6. The capital point is that owning US acreage alone or in an LLP leaves you accessible to acreage taxes that can be expensive.

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  8. Some very good points here... I am investigating which option is best. However, I am confused between the options of Cross Border Trust (which is irrevocable) vs Florida Land Trust (which is revocable), and the tax implications of each vs the cost to set them up. Any comments are appreciated.

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  9. I'm also interested in the best option. I want to buy one rental property soon to test whether it's worth it and to make a template for future purchases. 5-7K for the CBT is a lot of cake for only one, or a handful of properties, especially if the ongoing annual accounting is more expensive than owning it privately or in an LLP.

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