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 – February 27

Ask the Experts!

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

Question: I am working with a family that has an unusual circumstance.  Dad died in 2009, leaving an IRA naming his wife the beneficiary.  She died in 2012 without ever taking control of the account.  My client, the deceaseds’ daughter, was the contingent beneficiary of Dad’s account.  Is she entitled to the IRA?

Answer: Maybe, but not because she was the beneficiary of Dad’s account.

At Dad’s death, the IRA account’s ownership changed to the surviving spouse—even though Mom didn’t do anything to exercise control over the account.  At Mom’s subsequent death, her beneficiary would be the one entitled to the account.  Since under the facts given, Mom didn’t have a named beneficiary, Mom’s estate would be entitled to the money—not Dad’s contingent beneficiary.

The daughter may still be entitled to the money in the IRA if she is Mom’s lawful heir and no one has a prior claim to the IRA in Mom’s estate.  That’s something that would need to be sorted out during the estate administration process for Mom’s estate.

Treas. Reg. §1.401(a)(9)-3, A-5, says that if a surviving spouse fails to make any election after the death of the decedent, on the subsequent death of the surviving spouse, the IRA will be treated as her own for the purpose of the stretch rule.  Thus, any stretch options will be based on the assumption that the estate is the beneficiary of Mom’s IRA.

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 – November 1

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Here’s the question of the day.

Question: My client’s spouse died earlier this year.  One of her assets is an IRA that she inherited from her late father.  The deceased was taking required minimum distributions (RMDs) based on her life expectancy when she died.  My client is now the beneficiary of that account.  What are the RMD requirements?

Answer: After the subsequent death of the original beneficiary, the inherited IRA account is payable to the new beneficiary named by the original beneficiary.

The stretch distribution period is the life expectancy of the original beneficiary, using the Single Life Table and the age she attained or would have attained on her birthday in her year of death, reduced by one (1) in each subsequent year.

Here’s an example.  Say the original account owner, aged 90, died in 2010.  His daughter, age 60 in 2010, chose to treat the account as an inherited account.  Her first stretch distribution was due on or before December 31 of 2011.

In year 2011, the daughter is 61 and the factor from the Single Life Table is 23.3.  The account balance for 12/31/2010 is divided by 23.3 (equivalent to 4.29%) and that’s the RMD for 2011.

The daughter’s spouse is the beneficiary of the account.  The RMD for 2012 would be determined by using the daughter’s age of 61 in the year of death and the Single Life Table.  The factor for the daughter’s age in 2011 is 23.3.  For 2012, the account balance on 12/31/2011 would be divided by 22.3 and that’s the RMD.  For 2013, the factor would be 21.3, for 2020 the factor would be 14.3, and so forth.

Eventually, the factor would be less than one, and any remaining account balance would have to be distributed to the beneficiary in that year.

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.