Q: I am the executor of a New York estate where some of the beneficiaries live overseas. How does this impact their distributions?
A: In a diverse state like New York, it’s not uncommon to find estate plans that include bequests to nonresident beneficiaries. Many New Yorkers have children or other family members who live in another country but want to ensure that they are included in the estate plan. If you are an executor tasked with administering an estate with foreign beneficiaries, there are some unique considerations that you should take into account as you prepare to distribute.
First and foremost, you must determine the tax status of the foreign beneficiary. This can be handled by providing each foreign beneficiary with a copy of IRS Form W-8BEN, which requires the beneficiary to provide her name, country of citizenship, mailing address, and tax identification numbers (including a Social Security number, should she have one). If the beneficiary is a “non-resident alien”—that is, an individual who is not a U.S. citizen, does not have a green card, and does not pass the IRS’s “substantial presence test”—withholding is required on distributions of income to that beneficiary from the estate.
While the specific withholding rate varies for each country based on tax treaties, most often, and by default, the fiduciary is required to withhold 30%. You, as fiduciary, must pay that withholding to the United States Treasury each year. Failure to comply with these requirements subjects the estate to penalties, so it is crucial to ensure that the withholding is handled properly through the appropriate IRS forms. These are Forms 1042, 1042-T, and 1042-S, and they must be filed for each applicable tax year by March 15.
Additionally, you should note that your actions as fiduciary may impact the foreign beneficiary’s tax liabilities. Depending on the laws of the country, the beneficiary may not receive the same “step-up” in basis that United States heirs receive upon the death of an asset holder, subjecting the foreign beneficiary to significant capital gains tax. The beneficiary may even live in a country that imposes inheritance tax, resulting in further liabilities. For these reasons, it is important to communicate and coordinate with advisors in the beneficiary’s country who are familiar with their tax laws to ensure that the estate is in compliance with both United States and foreign law.
Because estates with overseas beneficiaries require additional attention and oversight, it can be difficult to navigate the waters without additional support. An experienced estates attorney, with the help of professionals abroad, may prove invaluable and ensure that you meet your fiduciary obligations in the most effective manner.
Britt Burner, Esq. is the Managing Partner at Burner Prudenti Law, P.C., focusing her practice areas on estate planning and elder law. Frank Oswald, Esq. is an associate attorney at Burner Prudenti Law, P.C., focusing his practice areas on trusts and estates. Burner Prudenti Law, P.C. serves clients from New York City to the East End of Long Island, with offices located in East Setauket, Westhampton Beach, Manhattan, and East Hampton.