Inheritance questions

[student2021]

Jurisdiction

Ohio

I am planning on reviewing the current setup of my will, trust and beneficiaries. My assets are divided into the following:
1) 403b accounts
2) Roth IRA accounts
3) taxable accounts
4) condo
5) life insurance policy

The total value is small so there will be no federal estate tax.

I have two heirs
1) Sibling 1, who is American
2) Niece (the daughter of sibling 2), who is Canadian.

I have a revocable trust with my two heirs as contingent trustees.

Currently I have the following setup.
1) 403b: Two heirs as beneficiaries.
2) Roth: Two heirs as beneficiaries.
3) Taxable: POD/TOD to two heirs directly or to revocable trust.
4) condo is in the revocable trust.
5) Life insurance policy: Revocable trust is the beneficiary.

Here are my understanding and some questions.
1) 403b accounts. Heirs need to pay tax when withdrawing money. Sibling 1 is only 5 years younger than me, so he can still utilize RMD that is based on his life expectancy, so it will not be impacted by the new law. Niece will have to take money out within 10 years. Since she is not an American, will this be an issue? Can she still RMD the money over 10 years?
2) Roth: No tax issues when withdrawing money. Will there be an issue for my niece since she is not an American?
3) Taxable: No immediate tax issues due to step-up basis. Will there be an issue for my niece since she is not an American?
4) Given that my niece is not an American, is there a better way to distribute the money such as I will only pass money to her via Roth/Taxable but not 403b?
5) Are there any additional issues that you see?

I do plan to talk to the lawyer who drew up the revocable trust but I thought I will ask these questions here first. Thank you for your help.

 

[Tax Counsel]

Here are my understanding and some questions.
1) 403b accounts. Heirs need to pay tax when withdrawing money. Sibling 1 is only 5 years younger than me, so he can still utilize RMD that is based on his life expectancy, so it will not be impacted by the new law. Niece will have to take money out within 10 years. Since she is not an American, will this be an issue? Can she still RMD the money over 10 years?

The same RMD rules apply regardless of whether the person receiving them is a citizen or resident (for tax purposes) of the U.S. However, under U.S. federal tax law most U.S. source income other than capital gains that are paid to a nonresident alien are taxed at a flat rate of 30%. Under the U.S. - Canada tax treaty, that rate is reduced to 15% for pension and annuity income, which would include income from a 403(b) account. The income may also be taxable in Canada, and to the extent she pays Canadian tax on the income she would get a foreign tax credit on her U.S. income tax return. The effect of that is that her tax on the distribution would end up being the larger of 15% or whatever the Canadian tax is on that income if that tax is more than 15%. In short, that's pretty favorable to her, actually.

2) Roth: No tax issues when withdrawing money. Will there be an issue for my niece since she is not an American?

No. For U.S. tax purposes that Roth distribution is not taxed even though she is a nonresident alien. Moreover, under the U.S. - Canada tax treaty that distribution is also tax free in Canada except to the extent she has made contributions herself to the Roth IRA, which would not be an issue for an inherited Roth.

3) Taxable: No immediate tax issues due to step-up basis. Will there be an issue for my niece since she is not an American?

The details of the trust and the distributions from it will matter as to relates to U.S. taxation of a nonresident alien. Note that while most U.S. source capital gain income received by a nonresident alien is not subject to U.S. federal income tax, gains derived by a nonresident alien from real property in the U.S. are taxed. That tax is no different than the tax paid by a U.S. citizen or resident. There are, however, special rules requiring withholding of income from gain from a US real property interest (USRPI) to ensure that the alien does in fact pay the tax.

4) Given that my niece is not an American, is there a better way to distribute the money such as I will only pass money to her via Roth/Taxable but not 403b?

You can certainly decide not to give her any part of your § 403(b) account if you want, but I'm not seeing what your concern is about passing her part of that account.

I do plan to talk to the lawyer who drew up the revocable trust but I thought I will ask these questions here first. Thank you for your help.

Just be aware that most estate planning attorneys are not experts in income tax, let alone the income taxation of nonresident aliens. You might want to seek advice from a tax professional familiar with the taxation of nonresident aliens to aid in your estate planning.

 

[army judge]

I do plan to talk to the lawyer who drew up the revocable trust but I thought I will ask these questions here first.

Speak with the lawyer who created the trust, or another lawyer you KNOW and TRUST.

Why risk your assets by seeking guidance from people you NEITHER know or trust?

Caveat Emptor....

 

[Redemptionman]

Tons of Estate Planning attorneys out there, find a good one and get on with it. It will be the best for you since they will know the best position for you to put your assets in.

 

[student2021]

Thank you so much for the responses.