Corporate Class Mutual Funds: Avoid U.S. Estate Tax¹

Case Studies

Scenario

After meeting with his advisor, Robert, who is a Canadian resident,² but not a U.S. citizen, was surprised to discover that upon his death he may be subject to U.S. estate tax. Robert could be subject to U.S. estate tax on his “U.S. situs property” if the value of his worldwide estate at the time of his death is above a certain threshold³. U.S. situs property includes, but is not limited to, U.S. real estate (e.g., a vacation home in Florida) as well as U.S. securities (e.g., shares of Apple Inc.). U.S. securities are considered U.S. situs property regardless if they are held in a Canadian brokerage account even if they are held in a registered account such as a Registered Retirement Savings Plan (RRSP) or Tax-Free Savings Account (TFSA). As a result, if Robert passes away holding U.S. securities directly he could be subject to U.S. estate tax on those holdings.

Solution

In order to avoid a potential U.S. estate tax liability on his U.S. security holdings, Robert can make an investment in a Manulife corporate class mutual fund. By owning an investment in a Manulife corporate class mutual fund Robert is investing in shares of a Canadian mutual fund corporation. Shares of a Canadian mutual fund corporation are not considered to be U.S. situs property, even if the fund invests in U.S. securities.⁴ Thus, upon his death, the value of his investment in a Manulife corporate class mutual fund which holds U.S. securities is not subject to U.S. estate tax.

Outcome

Manulife’s corporate class mutual funds will allow Robert to invest in U.S. securities without attracting U.S. estate tax upon his death, which depending on the value of his worldwide estate could result in significant tax savings. In addition, he can take advantage of the other benefits associated with Manulife’s corporate class mutual funds such as tax-efficient rebalancing, tax-efficient income and tax-efficient cash flow using Series T.

1 The case study is written for Canadian residents and is not applicable to U.S. citizens residing in Canada, U.S. residents (including “green card” holders) or Canadian citizens living in the U.S. as they face significantly different tax consequences. Accordingly, individuals should speak to their cross-border tax specialist about their specific situation. 2The reference to resident means resident for Canadian tax purposes. 3 In 2017, THE TAX CUTS AND JOBS ACT, H.R. 1 doubled the base exclusion amount for estate and gift tax to US$10 million (to be indexed for inflation). For 2019, the basic exclusion amount is US$11,400,000 with a maximum tax rate of 40%. 4 Note: Units of a Canadian mutual fund trust are also not considered U.S. situs property.

For more information on Manulife’s corporate class mutual funds and how they can help, speak to your advisor or refer to our related piece Manulife Corporate Class Funds – Tax-Efficient Investment Solutions for Investors (MK2750).

The commentary in this publication is for general information only and should not be considered investment or tax advice to any party. Individuals should seek the advice of professionals to ensure that any action taken with respect to this information is appropriate to their specific situation. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Manulife, Stylized M Design and Manulife Investment Management are trademarks of The Manufacturers Life Insurance Company and are used by it, and its affiliates under license.

MK2829E 06/19

Tax, Retirement & Estate Planning Services Team

Tax, Retirement & Estate Planning Services Team

Manulife Investment Management

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