Inherited IRA, with estate as beneficiary. All heirs are nonresident aliens (NRAs).
I am the court-appointed administrator of an estate. The decedent died intestate.
She was a permanent resident in the US (green card). She inherited the IRA from her spouse, a US citizen who pre-deceased her.
The inherited IRA (over $500K) is at a large brokerage firm and I arranged for the account to be transferred to an inherited IRA in my name, as executor for the estate of the named deceased.
Since there was no will, I am following state law on descent and distribution to determine the heirs. All of the heirs are NRAs who live outside the US, and have no connection to the US.
I could liquidate the IRA for the estate, and then make distributions to the NRA heirs, but there may be significant federal income tax ramifications for the estate itself. And then I might have an obligation to withhold 30% federal tax on net distributions to the heirs since they are NRAs.
As an alternative, I thought of having the heirs open inherited IRA accounts in the US (if even possible), and having the custodian make trustee-to-trustee transfers of their pro rata portion of the “estate’s” IRA to those inherited IRA accounts. That transfer would not be taxable, from what I read here. When the heirs liquidate the accounts during the 5-year distribution period, the custodian of their accounts would withhold the 30% federal tax on distributions to the NRAs.
Questions:
1. Do you know of any US custodians who would open an inherited IRA account for NRAs who are not present in the US?
2. If such an account is theoretically possible, how much trouble am I going to have getting the current custodian to make the transfers? From this discussion board, it seems many custodians balk at doing the trustee-to-trustee transfers.
Thanks in advance for any advice!
Permalink Submitted by Bruce Steiner on Wed, 2021-06-30 18:59
You could avoid the withholding issues by taking distributions and waiting until the year following the last payment before making distributions to the beneficiaries. By using a fiscal year you could spread the IRA over six or seven taxable years. You could use estate administration expenses against the IRA distributions. However, if the IRA is over $500,000, most likely most of it will be taxable in the highest bracket.
Check the applicable treaties. Depending on the recipient’s home country, the recipient could be exempt from U.S. tax on IRA distributions, or could be taxable on them at rates lower than 30%. Of course, the recipient will probably be taxable in his/her home country, probably with a credit for any U.S. tax.
If you distribute the IRA in kind, there are probably some custodians that would set up inherited IRAs for foreign beneficiaries. I would start with the incumbent custodian, Fidelity, Schwab International and Interactive Brokers.
Note that you’ll have to deal with withholding if you distribute other income. Ignoring the IRA, one way to avoid withholding is to wait until the year after you turn all the assets into cash, since there’s no withholding on bank interest.
Where is the lawyer handling the estate? If his/her firm has a good trusts and estates group, they should be at least somewhat familiar with this.
Bruce Steiner