If you are a Canadian who owns US real estate, planning for the possibility of incapacity is an essential component of prudent estate planning. Incapacity is the absence of the physical or mental faculties that are necessary to exercise civil and legal rights. If you become incapable, it will not be possible to rent or sell your US property. This article identifies the dangers of inadequate incapacity planning for Canadians with US real estate and how to properly plan for incapacity.
Guardianship Proceedings
In the United States, if an individual becomes incapacitated, a guardian must be appointed to look after his or her health care, and to manage his or her assets. The appointment of a guardian is a legal process through which a court declares the person concerned, the “ward”, to be legally incapacitated. The proceeding will be initiated by a family member or an interested party. The court must appoint a guardian to manage the affairs of the ward until the earlier of the two events occurs, the ward ceases to be incapacitated or the ward dies.
Guardian proceedings are lengthy, require legal representation and can be costly. While the court reviews the application for a guardian, the ward’s assets are completely frozen. There are, however, ways to avoid the necessity of undertaking guardianship proceedings in the event of incapacity.
How to Avoid Guardianship Proceedings
Guardianship proceedings can be avoided if one has a valid power of attorney. Unfortunately, a Canadian power of attorney or Quebec protection mandate (previously known as an “incapacity mandate” or “mandate in anticipation of incapacity”) is not be necessarily valid in each US State. Therefore, we frequently recommend our clients who own US real estate to sign powers of attorney governed by the laws of the State in which their property is located.
Most US States differentiate between powers of attorney for property, which designate persons (called “agents”) to manage your assets, and powers of attorney for health care (sometimes called “advance health care directives”), which designate persons to consent to medical treatment on your behalf. US States also recognize living wills. The function of this document is to inform your attending physicians, family members and other individuals what type of medical care you wish to receive should you become terminally ill or permanently unconscious.
Although a power of attorney for property allows your agents to sell your US property in the event of your incapacity without the need to undertake guardianship proceedings, title companies may refuse to close on a transaction when the power of attorney for property is one year old or more.
Holding US real estate through a Cross Border Trust (CBT) is an alternative and preferable means of planning for incapacity. A Canadian who owns US real estate would transfer his or her property into the CBT over which he or she would retain full control as the grantor of the CBT (its creator), a trustee (its administrator), and the beneficiary. He or she would need to have a co-trustee to act alongside him or her to ensure the validity of the CBT, but he or she can change the co-trustee at anytime.
Should you become incapacitated while your US property is a CBT, the trust agreement provides that your co-trustee or his or her successors can sell the property if it becomes necessary to do so without having to go through guardianship proceedings because the CBT holds the property rather than you directly. A title company will also be less likely to refuse to close on the sale of the property while you are incapable if it is held through a CBT.
If you own US real estate or contemplate acquiring a US property for personal use and/or rental purposes, we invite you to consult one of our qualified cross border tax and estate planning attorneys to assist you with all tax and estate planning issues surrounding ownership of US real estate.
About the author
Shlomi Steve Levy is a Partner of Levy Salis LLP and is a member of the Quebec Bar, the Law Society of Ontario (L3), the Society of Trust and Estate Practitioners, and the Canadian Bar Association.
