Distributing U.S. IRAs to U.S. and Canadian Beneficiaries

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Distributing U.S. IRAs to U.S. and Canadian Beneficiaries

Post by lawman3966 » Fri Jun 29, 2018 8:17 am

This question is related to a recent thread on cross-border inheritance, but goes in a different direction and thus warrants a separate thread.

I have an elderly mother living in Canada who is a Canadian citizen and former U.S. person - a former long-time green card holder. She has an estate worth about $ 1.2 million U.S., most of which is currently invested in Canada in the form of real estate and financial accounts. However, about $100K of her assets are in U.S. IRAs. The purpose of this thread is to determine optimal strategies for distributing the IRAs in light of three factors (1) the existence of beneficiaries in both the U.S. and Canada (one in the U.S. and two in Canada); (2) the general tax treatment of IRAS (by both countries); and (3) the cross-border inheritance tax issues.

My understanding is that bringing deductible U.S. IRAs to Canada causes the IRA funds to be taxed twice, once by the U.S. (since the account was funded with pre-tax money); and again by Canada once the funds are liberated from the U.S. IRA accounts. A normal estate process might well entail (1) withdrawing money from the U.S. IRA accounts and paying U.S. taxes thereon; (2) moving the money to Canada; (3) paying Canadian taxes on the now post-U.S.-tax funds; and (4) distributing the now double-taxed money to the beneficiaries, in both the U.S. and Canada.

Given that one beneficiary lives in the U.S., I am wondering if there's a more efficient way to distribute the IRA assets. For instance, is there a way to more directly transfer the IRA account itself, or funds from the IRA more directly to the one U.S. beneficiary and to thereby avoid having the IRA assets taxed two (and possibly three times if one counts the cross-border inheritance tax).

Another factor here is a desire to have the IRA accounts depleted and closed prior to the testator's death due to the cross-border inheritance tax issues. It's not clear whether that's going to be feasible or not. Since I don't know what distribution options exist for the IRA assets if conducting an inter-vivos transfer or upon management of the estate, it's hard for me to know what to recommend regarding IRA account handling. My first reaction was that the tax hit by the U.S. and Canada would be similar whether transferred during her life or upon her death. I have already heard the concern expressed that a rapid withdrawal of the IRA assets would incur heavy taxation (though I don't know if such taxation is any heavier than what the beneficiaries would ultimately pay).

If anyone knows of a way to efficiently transfer the IRAs more directly to the one U.S. beneficiary either on an inter-vivos basis or upon death, instead of going through the probate process (and the possibility of the assets being triple-taxed), I would love to know of it. Since the IRA assets are less than 1/3 of the estate, her will could be readily changed to suitably adjust the distribution of non-IRA assets to produce an equitable overall distribution.

Thanks in advance to any help the board can provide.

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