Estate Planning US Citizen Resident in US: Estate Beneficiaries Indian Citizens

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Caputo00
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Estate Planning US Citizen Resident in US: Estate Beneficiaries Indian Citizens

Post by Caputo00 » Sun Jun 09, 2019 5:43 pm

I am a US Citizen with <1.5 Million in assets with the majority in 401K funds and ~250K in equity in a house in TX that is now a rental property. A brother and sister and India are named beneficiaries of the 401K assets. I understand from casual reading that since they are not citizens it will lead to punitive Estate Taxes.

I do have a brother and sister in the US who are also US citizens who do not need the money (and have adult children that are likely to be adequately looked after from their assets).

All siblings are older than me but I have a serious underlying health issue so may die sooner than siblings.

Q1) What are my best options in terms of limiting the tax burden? Can I set up a trust based in the US with siblings in India as beneficiaries and provision to liquidate rest to charitable causes in the US upon their death? Considering modest amount of assets is this even feasible? The idea here is to slow the rate at which the 401K is liquidated and spread tax burden over several years.

Q2) How do I identify a professional who can actually answer these questions (i.e. conversant with estate and Tax laws in both the US and India)?

bsteiner
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Re: Estate Planning US Citizen Resident in US: Estate Beneficiaries Indian Citizens

Post by bsteiner » Sun Jun 09, 2019 8:41 pm

Caputo00 wrote:
Sun Jun 09, 2019 5:43 pm
I am a US Citizen with <1.5 Million in assets with the majority in 401K funds and ~250K in equity in a house in TX that is now a rental property. A brother and sister and India are named beneficiaries of the 401K assets. I understand from casual reading that since they are not citizens it will lead to punitive Estate Taxes.

I do have a brother and sister in the US who are also US citizens who do not need the money (and have adult children that are likely to be adequately looked after from their assets).

All siblings are older than me but I have a serious underlying health issue so may die sooner than siblings.

Q1) What are my best options in terms of limiting the tax burden? Can I set up a trust based in the US with siblings in India as beneficiaries and provision to liquidate rest to charitable causes in the US upon their death? Considering modest amount of assets is this even feasible? The idea here is to slow the rate at which the 401K is liquidated and spread tax burden over several years.

Q2) How do I identify a professional who can actually answer these questions (i.e. conversant with estate and Tax laws in both the US and India)?
You can create such a trust. It's definitely feasible. Under current law, it's not needed to be able to stretch the IRA over their life expectancy.

India repealed its estate tax in the 1980s.

If input as to the Indian income tax is needed, you or your lawyer should consult with Indian counsel.

TedSwippet
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Re: Estate Planning US Citizen Resident in US: Estate Beneficiaries Indian Citizens

Post by TedSwippet » Mon Jun 10, 2019 3:00 am

Welcome.
Caputo00 wrote:
Sun Jun 09, 2019 5:43 pm
I am a US Citizen with <1.5 Million in assets with the majority in 401K funds and ~250K in equity in a house in TX that is now a rental property. A brother and sister and India are named beneficiaries of the 401K assets. I understand from casual reading that since they are not citizens it will lead to punitive Estate Taxes.
Are you sure you have not misread the details? The US estate tax falls on the estate of the deceased, not the beneficiaries(*). And while it is true that dead non-US citizens have a pitiful $60k exemption for US estate taxes, dead citizens currently have around $11mm.

I am not familiar with the general US tax rules for inherited 401ks, nor those for retirement savings plans inherited by non-US citizens, but overall, on the details given, I don't see any punitive US estate tax here.


(*) Apart from section 2801 -- that is applied to beneficiaries of gifts and bequests from some ex-citizens. Unless you renounce your US citizenship and get trapped by the US's appalling 'exit tax', 2801 won't apply.

QuantOfAsia
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Re: Estate Planning US Citizen Resident in US: Estate Beneficiaries Indian Citizens

Post by QuantOfAsia » Mon Jun 10, 2019 7:54 am

Ted's right - estate tax is on the dead guy, not the heirs, so if you die American with less than the estate tax threshold at that time, you should be fine from that perspective.

Under current law, beneficiaries of your inherited 401k can "stretch" it out and pay taxes annually on their RMDs, which may be accelerated to 5-10 years under proposed law. If your beneficiaries are in India, their withdrawals might be covered by the US-India treaty (https://www.irs.gov/pub/irs-trty/india.pdf), which as I read it, ensures the withdrawals are only taxed once. Important to check how this affects Roth if some of your retirement plan is Roth.

mchampse
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Re: Estate Planning US Citizen Resident in US: Estate Beneficiaries Indian Citizens

Post by mchampse » Mon Jun 10, 2019 11:26 am

The simplest might be to name your American siblings as beneficiaries on the understanding that they pass it on to your Indian siblings.

Even if there are no additional taxes, there is likely to be additional paperwork and hassle. It may also prove to be beneficial for them to roll into an inherited IRA which isn’t an easy option for non-residents.

crre
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Re: Estate Planning US Citizen Resident in US: Estate Beneficiaries Indian Citizens

Post by crre » Mon Jun 10, 2019 1:05 pm

as others have mentioned, the estate tax will be an issue for the beneficiaries of your beneficiaries when your beneficiaries die. but it is true that you should be thinking of this now, because it may take them time after your death to move the money out of the u.s., and if they die in the interim the estate tax kicks in. also it is possible they will not understand or forget the importance of moving the money out of the u.s. promptly.

i believe a trust could solve the issue, but you should really consult with an estate tax attorney, preferably one familiar with both u.s. and indian estate law. how to find such a person? ask around, especially among the indian community in the u.s. if you cannot find such a person, then an estate tax attorney familiar with international inheritance issues but not india in particular could be a good choice. i found my attorney through a referral from my accountant. another idea would be to ask a recommended estate tax attorney who is not familiar with international matters for a referral to one who is.

best of luck and best of health to you.

QuantOfAsia
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Re: Estate Planning US Citizen Resident in US: Estate Beneficiaries Indian Citizens

Post by QuantOfAsia » Mon Jun 10, 2019 6:09 pm

mchampse wrote:
Mon Jun 10, 2019 11:26 am
The simplest might be to name your American siblings as beneficiaries on the understanding that they pass it on to your Indian siblings.

Even if there are no additional taxes, there is likely to be additional paperwork and hassle. It may also prove to be beneficial for them to roll into an inherited IRA which isn’t an easy option for non-residents.
That's one approach if your intent is to let your US sibling heirs have discretion - they will need to watch out for the annual gift tax exclusion (currently $15,000) to avoid replacing withholding taxes with potentially much higher gift taxes.

QuantOfAsia
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Re: Estate Planning US Citizen Resident in US: Estate Beneficiaries Indian Citizens

Post by QuantOfAsia » Mon Jun 10, 2019 6:16 pm

crre wrote:
Mon Jun 10, 2019 1:05 pm
as others have mentioned, the estate tax will be an issue for the beneficiaries of your beneficiaries when your beneficiaries die. but it is true that you should be thinking of this now, because it may take them time after your death to move the money out of the u.s., and if they die in the interim the estate tax kicks in. also it is possible they will not understand or forget the importance of moving the money out of the u.s. promptly.

i believe a trust could solve the issue, but you should really consult with an estate tax attorney, preferably one familiar with both u.s. and indian estate law. how to find such a person? ask around, especially among the indian community in the u.s. if you cannot find such a person, then an estate tax attorney familiar with international inheritance issues but not india in particular could be a good choice. i found my attorney through a referral from my accountant. another idea would be to ask a recommended estate tax attorney who is not familiar with international matters for a referral to one who is.

best of luck and best of health to you.
You can do all sorts of things with trusts, though the devil is in the details of what exact type of trust. In this case, the OP may want one trust to cover his house and other non-retirement assets simply for avoiding probate, though that will not have any tax consequences. A retirement trust is a separate and special animal which which would cover the 401k and help the trustee distribute it in an tax efficient manner, and these tax savings may or may not be more than the fees for setting up and running the trust, especially if the "stretch" option gets killed this year, though retirement tax savings really come more from this management of the "stretch" than anything else.

Indian estate law is for someone dying in India or with Indian assets, and probably won't be required if this whole estate is US situs - the main thing to check would be whether there are any tax consequences to being an Indian resident beneficiary of a US trust if a trust is used.

mchampse
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Re: Estate Planning US Citizen Resident in US: Estate Beneficiaries Indian Citizens

Post by mchampse » Mon Jun 10, 2019 6:50 pm

QuantOfAsia wrote:
Mon Jun 10, 2019 6:09 pm
mchampse wrote:
Mon Jun 10, 2019 11:26 am
The simplest might be to name your American siblings as beneficiaries on the understanding that they pass it on to your Indian siblings.

Even if there are no additional taxes, there is likely to be additional paperwork and hassle. It may also prove to be beneficial for them to roll into an inherited IRA which isn’t an easy option for non-residents.
That's one approach if your intent is to let your US sibling heirs have discretion - they will need to watch out for the annual gift tax exclusion (currently $15,000) to avoid replacing withholding taxes with potentially much higher gift taxes.
They would have to file that they made a gift, but no actual taxes until they’ve gifted $11/22 million or so.

crre
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Re: Estate Planning US Citizen Resident in US: Estate Beneficiaries Indian Citizens

Post by crre » Tue Jun 11, 2019 1:03 pm

QuantOfAsia wrote:
Mon Jun 10, 2019 6:16 pm
Indian estate law is for someone dying in India or with Indian assets, and probably won't be required if this whole estate is US situs - the main thing to check would be whether there are any tax consequences to being an Indian resident beneficiary of a US trust if a trust is used.
the beneficiaries are in india. it would be good to have things set up in a way that takes into consideration the resulting complications. surely there are a few of those.

QuantOfAsia
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Re: Estate Planning US Citizen Resident in US: Estate Beneficiaries Indian Citizens

Post by QuantOfAsia » Tue Jun 11, 2019 7:13 pm

mchampse wrote:
Mon Jun 10, 2019 6:50 pm
QuantOfAsia wrote:
Mon Jun 10, 2019 6:09 pm
mchampse wrote:
Mon Jun 10, 2019 11:26 am
The simplest might be to name your American siblings as beneficiaries on the understanding that they pass it on to your Indian siblings.

Even if there are no additional taxes, there is likely to be additional paperwork and hassle. It may also prove to be beneficial for them to roll into an inherited IRA which isn’t an easy option for non-residents.
That's one approach if your intent is to let your US sibling heirs have discretion - they will need to watch out for the annual gift tax exclusion (currently $15,000) to avoid replacing withholding taxes with potentially much higher gift taxes.
They would have to file that they made a gift, but no actual taxes until they’ve gifted $11/22 million or so.
Maybe no gift taxes now, but giving more than the $15,000 per donor-donee pair per year would eat into their lifetime exclusion, and I wouldn't want to do that to my siblings if I didn't have to.

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celia
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Re: Estate Planning US Citizen Resident in US: Estate Beneficiaries Indian Citizens

Post by celia » Tue Jun 11, 2019 7:37 pm

I’m sure the IRS will want their share when any 401K withdrawals are made. After all, the taxes are being DEFERRED, not eliminated. They will also want to know the tax ID/ SSN of the person taking the withdrawals.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.

Topic Author
Caputo00
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Re: Estate Planning US Citizen Resident in US: Estate Beneficiaries Indian Citizens

Post by Caputo00 » Tue Jun 11, 2019 8:19 pm

TedSwippet wrote:
Mon Jun 10, 2019 3:00 am

Are you sure you have not misread the details? The US estate tax falls on the estate of the deceased, not the beneficiaries(*). And while it is true that dead non-US citizens have a pitiful $60k exemption for US estate taxes, dead citizens currently have around $11mm.
I had indeed misread the $60K Estate exemption for non-US citizens as applying to non-US beneficiaries. Thanks for the clarification.

Topic Author
Caputo00
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Re: Estate Planning US Citizen Resident in US: Estate Beneficiaries Indian Citizens

Post by Caputo00 » Tue Jun 11, 2019 9:03 pm

celia wrote:
Tue Jun 11, 2019 7:37 pm
I’m sure the IRS will want their share when any 401K withdrawals are made. After all, the taxes are being DEFERRED, not eliminated. They will also want to know the tax ID/ SSN of the person taking the withdrawals.
Agreed, I am fine with paying taxes but want to avoid gotchas that instantly create a burden - for example it is simple for a citizen to inherit an IRA and "stretch" withdrawals for the most favorable tax treatment. Finding a custodian willing to grant the same privileges to a non-citizen may be a challenge to non-financially savvy non-citizen beneficiaries. If forced to repatriatie the entire sum instantly it would instantly place them in a much higher tax bracket than what they may have had to pay if the "stretch" IRA option was granted. It may be available in principle and by law, but may practically not be available in fact because of custodian issues.

On the contrary choosing to leave the $ in a US based institution to take advantage of the stretch option will automatically create the $60K estate exclusion highlighted by others. They like me are childless so the impact is minimal if it went to the State on death. However, given a choice I would rather be able to shape how those $ were spent - e.g. I believe in Colleges, or Libraries and numerous other causes that I believe will sustain future American prosperity and would rather the $ went in those directions if I can achieve that through planning.

I appreciate the many thoughtful insights provided by the many contributors to this thread.

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celia
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Re: Estate Planning US Citizen Resident in US: Estate Beneficiaries Indian Citizens

Post by celia » Wed Jun 12, 2019 10:55 pm

Caputo00 wrote:
Tue Jun 11, 2019 9:03 pm
Agreed, I am fine with paying taxes but want to avoid gotchas that instantly create a burden - for example it is simple for a citizen to inherit an IRA and "stretch" withdrawals for the most favorable tax treatment. Finding a custodian willing to grant the same privileges to a non-citizen may be a challenge to non-financially savvy non-citizen beneficiaries.
This ISN'T up to the custodian to decide. It is law/rules for IRA and 401Ks.

For more background on this, I was helping a relative who wanted to leave part of their tax-deferred account to a foreign mission, not recognized by the IRS. I was talking to the retirement specialists at Vanguard about what would happen after the relative died. They replied that the recipient had to be acknowledged by the IRS with a tax ID number. There was also the implication that I picked up on that the custodians have to follow IRS rules to avoid money laundering and the money going to terrorists.

One thing you can do is to stop putting money into these tax-advantage accounts. That is why many non-citizens working in the U.S. who plan to go back to their home country don't contribute to these accounts.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.

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