# Inheriting an Asset from the United States



## Pacifica (Oct 19, 2011)

I am the direct beneficiary of an US annuity from a recently deceased Canadian/US dual citizen. He was resident and domiciled in Canada. The estate is probated and administered in Canada. I would receive the annuity as a lump sum payout. I have the option to accept it directly or decline it in favour of the estate. I am not a US citizen nor resident and have no assets in nor income from the US.

(1) It’s clear to me that the annuity payout would be my US source income if I inherit the annuity directly. 

(2) I’d like to know if I were to decline the annuity and it went into the estate and I received it through the estate:

(a) Would the money from that annuity that I received through the estate be *my *US source income? (I’d deal with US tax filings regarding it);

(b) Or would it be *the estate’s* US source income? (The estate would deal with the US tax filings regarding it and the remainder would be distributed to me but would not be for me US source income?)


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## Bevdeforges (Nov 16, 2007)

Under normal circumstances, IRS Publication 939 would be your guide: https://www.irs.gov/pub/irs-pdf/p939.pdf

If Canadian inheritance law works like US law, I think it might be easiest to take the annuity as a lump-sum payment, since that way the estate would settle up the taxes due before distributing the assets, and you'd receive the lump-sum payment subject only to ongoing Canadian taxes - like any lump-sum inheritance. (Basically, the estate liquidates the assets, pays the taxes due and distributes what's left.)

If you try to take it as an ongoing annuity, I'm afraid you may wind up with US tax liability on some or all of the payments - and as a non-US person, the IRS takes 30% up front. 

This may be a case where "take the money and run" is the simplest approach.
Cheers,
Bev


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## JustLurking (Mar 25, 2015)

Bevdeforges said:


> If you try to take it as an ongoing annuity, I'm afraid you may wind up with US tax liability on some or all of the payments - and as a non-US person, the IRS takes 30% up front.


...unless modified by treaty. The US/Canada tax treaty shows a 15% US tax rate for pensions and annuities. See also IRS pub 901.


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## Bevdeforges (Nov 16, 2007)

JustLurking said:


> ...unless modified by treaty. The US/Canada tax treaty shows a 15% US tax rate for pensions and annuities. See also IRS pub 901.


Taking it as a lump sum still sounds the "easier" way to go. Let the estate handle the "cross border" aspects of it all.
Cheers,
Bev


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## BBCWatcher (Dec 28, 2012)

A lump sum has greater exchange rate risk, and (though probably not) you'd want to make sure you're not pushed up into a higher tax bracket versus taking regular payments. Or there's the possibility that the ongoing U.S. tax implications (and treaty rate) are more favorable than what Canada would allow you to do with the money.

I don't think this is an automatic decision in favor of a lump sum. "More research required."


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## Bevdeforges (Nov 16, 2007)

There are two "taxes" to consider here. On distribution, if you're taking the lump sum from the estate (rather than from the annuity itself), there is no income tax involved. It's as if you were getting the funds from a bank account - distribution of capital (assuming the estate has settled the inheritance taxes).

If the deceased were liquidating the annuity himself there would possibly be some income tax consideration for the difference between the amounts invested in the fund and the value of the fund at the date of liquidation. But generally speaking, if the annuity runs through the probate process, it should be the estate that pays any taxes due on the assessed value of the annuity at the date of death or at the date the estate liquidates the annuity. (Again, I'm not sure how Canadian inheritance taxes work.)

If you take the annual payments, then yes, you'll be liable for US income taxes on the "appreciation" value of the payments as calculated each year at payout time. You should ask the executor of the estate, but I think that's something that would pass to you, so that you'd be paying US income tax on the gains in the annuity fund over the decedent's original investment. I don't think the estate would manage the annual distributions for you - but hey, you can always ask!
Cheers,
Bev


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## maz57 (Apr 17, 2012)

One way to mitigate the exchange rate risk would be to take the lump sum in US dollars and choose the timing and amount of the conversion yourself. Most of the major Canadian banks offer US dollar savings/checking accounts so from there one can convert none, some, or all of the proceeds to Canadian dollars with total control. 

At the current exchange rate now is not a bad time to receive US dollars. The investment arm of my own bank will allow me to both purchase and hold US securities in US dollars with no currency conversion required. I imagine most other Canadian institutions would offer a similar deal. This winds up being a Canadian investment at a Canadian institution even though it is denominated in US dollars. Any income will be subject to US withholding at the 15% treaty rate. Although I suppose one could file a 1040NR to get a refund of that US tax withheld, it is much easier to simply claim it as a foreign tax credit on one's Canadian return and not bother with a US return. The IRS, of course, is happy to keep the money.


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## BBCWatcher (Dec 28, 2012)

Or you could "split the difference." It is typically possible to take a partial lump sum on an annuity, and sometimes that makes sense. I would add that you'd also look at the net present value (lump sum) compared to the annuity stream terms/conditions. Sometimes the stream is the better deal, sometimes the lump sum. It depends on what the investment company is offering. If they're offering $20 if you end your $5/month annuity, that's probably not a great deal. And some people just don't do a great job managing lump sums -- they go to the casino, and it's gone (or whatever) -- so if the assured income stream itself is valuable, then that might be a factor.

So you just do some research to figure out what makes the most sense, in large part based on tax implications. It's hard to predict from afar what would make the most sense in this case.


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## Pacifica (Oct 19, 2011)

Thanks, everyone, for your input. 

I’d like to focus particularly on one aspect:

This annuity is a very small part of the entire estate. The usual desire, to minimise tax and maximise net income, is not a major factor to me regarding this. 

Of key importance to me is – can I avoid having to file with IRS if I opt to receive it through the estate? I would like to keep my personal tax filing simple (deal only with one country). Were a larger amount of money at stake, that would be different.

Bev addressed this issue of having a US asset pass through an estate, and I think I’m pretty clear on it now. But I want to be sure I am, so …

I’m an NRA – the decedent was dual US/Cdn citizen, Cdn resident -- and the rest of decedent’s assets are Canadian. 

If an asset comes into the estate from the US, I would presume the US wants somebody to pay income tax on it because it leaves the country. Is that correct?

If so, the estate pays the US income tax on the lump sum that goes into the estate?

Then the remainder (after all applicable taxes) is distributed tax-free to the estate beneficiary as regards the US? The estate beneficiary doesn’t have to report anything to IRS?

Or does an asset which comes into a foreign estate from the US remain as “US source income” when it gets distributed to the estate beneficiary (an NRA), with the estate beneficiary required to file US income (or any type of US) tax on it?


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## Bevdeforges (Nov 16, 2007)

I'm not certain of all the details regarding a "US asset" in a Canadian estate, but the overall principle I was alluding to is the idea that, if you take the annuity in a lump sum, it's a one-shot deal. Any taxes owed to the US (whether estate taxes or income taxes on annuity earnings from the date of death to the date of distribution) are paid by either the estate, or withheld by the annuity company. At that point, the "annuity" becomes just a lump of money and you're free to do with it as you will (subject, of course, to your own country of residence laws). The IRS is out of it.

I suspected that was what you wanted to know. And from that point of view, I think that might be the "easiest" route with the least ramifications down the line. You'd have to ask the executor if it's possible to have the annuity cashed out as part of the estate settlement (so that the estate deals with the taxes of all varieties), but even if not, taking the cash and running (after the IRS takes its cut) is how to cut off your dealings with the IRS neatly and cleanly.
Cheers,
Bev


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## JustLurking (Mar 25, 2015)

Pacifica said:


> Of key importance to me is – can I avoid having to file with IRS if I opt to receive it through the estate?


On my reading of the facts, and as I understand things, you personally avoid contact with the IRS both ways.

If you take it as a lump sum, the estate pays the tax, deals with the IRS, and sends you the balance. If you take it as a rolling annuity and send the payer a W-8BEN, they will deduct 15% -- US/Canada treaty rate -- as US tax withholding, send that to the IRS, and send you the remainder. This 15% isn't recoverable from the US by you in any way, but because your US tax liability is satisfied entirely by it you also don't have to file a 1040nr or anything else with the US. You may be able to take a credit against Canadian tax for the US 15% withholding.


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## Pacifica (Oct 19, 2011)

@ Bev and Just Lurking,

Thanks very much. I wanted to be sure I knew about how things worked regarding that specific issue before speaking with and proceeding with the annuity company and executor. (Always good to have background knowledge when dealing with professionals, but seems to be especially so when dealing with cross-border tax issues!)

And thanks to everyone as it’s also good to know about the big picture and related aspects.


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