When you have internationally located family members or non-U.S. citizen relatives, you may want to make one a beneficiary of your U.S.-based retirement account. You probably already have an idea of the different tax issues faced by non-U.S. citizens, so making your beneficiary designation will raise questions about whether it is a good idea.
First, it is possible to name a non-U.S. citizen as a retirement account beneficiary. The retirement account could be an IRA, a 401(k), or a similar account. When you make the designation, the account administrator may need more information about whether the beneficiary is a “U.S. person” or a “foreign person” for United States tax purposes. U.S. persons include citizens, residents, estates of citizens, domestic trusts, and domestic business organizations. Foreign persons include nonresident aliens, foreign estates, foreign trusts, and foreign business organizations.
If the administrator determines that your beneficiary is a foreign person, it will withhold 30% of retirement plan distributions to that person to pay taxes. To show that a beneficiary is a resident rather than a foreign person, you may need to provide additional documentation to the administrator. Further, you may be able to avoid the 30% rate if the beneficiary is a citizen of a country that has a tax treaty with the United States.
That 30% withholding rate can substantially reduce what your beneficiary actually receives from your retirement plan. You and your beneficiary have a few options to work around it. Your beneficiary could decide to disclaim the distributions and allow them to pass to the contingent plan beneficiary (the backup person if the main beneficiary passes away or disclaims distributions). But this might frustrate your original intent in making the designation. Instead, if you want to give the plan distributions to your spouse, you could create a qualified domestic trust and make it the beneficiary.
There may be some other options for you if you want to benefit a non-spouse but do not want the 30% tax rate. An estate planning attorney who is experienced with international families can help you make an informed decision about your beneficiary designation on a retirement account.
Planning your estate? Look to Janet Brewer, Esq. for thorough and thoughtful estate planning advice. Janet’s more than 20 years of legal experience will give you confidence and peace of mind. To schedule a “Get Acquainted” meeting, visit Janet's website or call her office at (650) 469-8206.