Advanced Underwriting Consultants

Question of the Day – May 7

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax questions posed by producers.  Here’s the question of the day.

Question: My client died, leaving her son as the beneficiary of her IRA.  The son is a Canadian citizen living in Toronto.  What are the tax results?

Answer: The son, as a nonspouse beneficiary of an IRA, has the normal ability to stretch the taxable distributions of the IRA based on his life expectancy.

Any U.S. source income is taxed when paid to foreign persons.  Here’s an excerpt from IRS Publication 515:

In most cases, a foreign person is subject to U.S. tax on its U.S. source income. Most types of U.S. source income received by a foreign person are subject to U.S. tax of 30%. A reduced rate, including exemption, may apply if there is a tax treaty between the foreign person’s country of residence and the United States. The tax is generally withheld (NRA withholding) from the payment made to the foreign person.

It’s up to the IRA custodian to withhold 30% of the taxable IRA distribution.

The Canadian national MAY be able to get back some of the withheld amount by filing a U.S. tax return for the year in which a distribution is received.  The Canadian national may also be liable for Canadian income tax on the distribution.  He should contact a tax professional familiar with multi-jurisdictional tax issues to find out.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.

Question of the Day – September 23

Ask the Experts!

Here’s the question of the day.

Question: My client died naming his estate the beneficiary of his IRA.  The surviving spouse is the only beneficiary of the estate.  Can the IRA qualify for spousal rollover?

Answer: Maybe, although it may require seeking a private letter ruling to achieve tax certainty.

Most people assume that if a trust or the estate is the beneficiary and a surviving spouse is the trustee or executor of the estate, the surviving spouse can just take a distribution and roll it into his/her IRA.

It is IRS policy to allow such a rollover provided

  • the surviving spouse is the only beneficiary of the trust or estate and
  • the surviving spouse has the right as trustee or executor to cause the IRA to be distributed to himself/herself without the consent of a third party.

Any other set of circumstances would defeat the ability of a surviving spouse to do a spousal rollover.

As if this were not bad enough, the above is merely an IRS policy spelled out in Private Letter Rulings.  The regulations or published IRS rulings do not give any citable authority for the position.  Numerous PLRs have allowed for the spousal rollover, but it was necessary for the surviving spouse to go to the time and expense to get a PLR.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.