401k non-US citizen beneficiary treatment at death
I have a client that is married to an individual that has her green card. He has left his company, but still maintains his 401k there. His wife is currently the beneficiary on this 401k. He heard that if he dies she will be taxed on the full amount of the 401k and not be able to roll it out as her own upon his death. Is this true and if so any idea where I can proof of that? Also, does that change if he were to roll it out to an IRA and name her the beneficiary while he is still living? Thanks.
Permalink Submitted by mk foss on Sat, 2013-02-23 22:22
The dire consequences occur when someone has a noncitizen spouse that inherits an IRA. A green card holder is generally treated as a U.S. cititzen. If she were to give up her green card and be considered a noncitizen spouse, her withdrawals would be subject to income tax just like anyone else. The rollover might be considered a principal distribution and could cause estate tax to be imposed. With the $5 million + estate tax threshhold, that may not be a problem. However, it should be discussed with their estate planning attorney.
Permalink Submitted by Bruce Steiner on Sun, 2013-02-24 03:43
“Dire consequences” is a bit strong. If the spouse is a U.S. resident but not a U.S. citizen, she’s subject to income tax in the same way as a citizen. However, for estate tax purposes, in order to qualify for the marital deduction, assets have to pass in the form of a qualified domestic trust (QDOT). A QDOT is essentially a QTIP trust, except that there has to be a trustee in the U.S. who is responsible for seeing to it that the estate tax is payable at the spouse’s death, or (with limited exceptions) if principal is distributed to the spouse. The reason for this is that, if assets passing to a noncitizen spouse qualified for the marital deduction, the spouse could leave the U.S. and the estate tax would never be paid at the spouse’s death. The spouse can also create her own QDOT and put any assets she inherits outright into the QDOT. Without more, that would create a problem for retirement benefits. If he leaves them to her outright, she can’t both roll them over and also put them in a QDOT. If he leaves them to a QDOT, she can’t roll them over, and the trust would be limited to stretching distributions out over her life expectancy. However, Treas. Reg. § 20.2056A-4(c) allows the spouse to agree to put the principal portion of each distribution into a QDOT when she receives it. The QDOT can reimburse her for the income tax she pays on it. See PLRs 9623063 and 9746049 for different ways of accomplishing this.
Permalink Submitted by Ryan Smith on Tue, 2013-02-26 15:17
He will be under the $5mill for the estate tax, therefore in this situation we should be looking at just doing a rollover. Are you saying that there is no difference if it is in a 401k or an IRA in terms of her eligibility to roll this to her own IRA? Sounds like he should just buy a big life insurance policy to cover her.
Permalink Submitted by Bruce Steiner on Tue, 2013-02-26 21:58
There was nothing in the facts that would suggest that he needed (or that he didn’t need) life insurance.
Permalink Submitted by Ryan Smith on Wed, 2013-02-27 16:28
Just was a thought as that would all be tax free and he would not have to worry about the taxation. Once again “Are you saying that there is no difference if it is in a 401k or an IRA in terms of her eligibility to roll this to her own IRA?” Thanks.
Permalink Submitted by mk foss on Fri, 2013-03-01 02:09
There are a couple of issues here. For income taxation, the beneficiary regardless of identity or citizenship status must take Required Minimum Distributions and pay U.S. tax on them.Estate tax is assessed on U.S. citizens and residents with net wroth over a specified amount – currently $5 million +. If the first spuse to die is over that amount, the tax can be deferred until the death of a citizxen spouse if assets are transferred directly or through a qualifying trust. Assets that go to a noncitizen spouse are taxable based on the first spouse’s asset base whenever principal is withdrawn.
Permalink Submitted by Douglas Conoway on Fri, 2015-09-25 18:46
Excellent discussion. What happens re income tax if the beneficisry is a non-spouse citizen of another ocuntry? Is there a risk the full amount will be taxed? What must be done to effect a stretch? Is a QDOT required to receive (pass thru) the RMD’s? What other pitfalls may exist?
Permalink Submitted by Bruce Steiner on Fri, 2015-09-25 21:26
Permalink Submitted by Emmanuel Myers on Wed, 2017-06-21 21:08
My Name is Emmanuel Myers. My wife is not a US Citizen. She is listed in teh US as an illegal alien, although we are working with attorneys to get her legal. My question is can my wife be listed as my beneficiary on my 401K and life insurance policy and god forbid if I pass away will she be able to claim the money or run into some government issues due to her status? She has been lisetd on my tax returns and has had an ITIN # for 14 years. My email is [email protected].