Inherited IRAs and UK beneficiaries?

Here's the set up.
I'm a US/UK dual national living in the US and I have family back in the UK who I will be leaving money to in my will. I have diligently included them as beneficiaries on my IRAs as the usual advice is to do that to avoid probate and for tax efficiency. However, as they a UK citizens and residents I wonder of that's the most convenient approach. They won't want to deal with accounts in the US and all the tax issues and will probably just want the lump sum. I know this is probably not the most tax efficient approach, but would it be easier just to leave the IRA to my estate? Would the tax obligation on the proceeds of the IRA just pass thorough to my heirs anyway even if the estate sold the funds and just sent my heirs a check. Is the very best thing just to give them as much as possible before I croak and get everything else into ROTHs?

We are in a similar situation with our beneficiaries being our children. One lives in England the other lives in California but is planning on moving to Australia with her husband in about 10 years.

We have been converting our IRAs to Roths over the last 12 years and as of this year are 100% Roths so no tax issues on liquidation.

For the last 5 years we have also been transferring money to them and will continue to do so to minimise UK inheritance tax. 

We have revised our wills recently and went through similar considerations, but unlike yourself, I have no investments in the US. I do have beneficiaries in both the US and the UK.

The beneficiaries in the UK are smart people (barrister, "city" financier, physicist). Even so, I would be very reluctant to dump any US tax or management requirements on them. Whilst capable of eventually getting their heads around the US system if it were required, which it's not, I would be reluctant to force them into a situation of spending the time and money to resolve it. Cash is the easiest solution. As it stands now, there will be UK inheritance tax due to HMRC on the estate, but not knowing what end of life costs may be with no children to look after us means being reluctant to divest too much cash beforehand.

For those of us resident in the UK, there will also be the problem of how the final year US tax return is completed. A job for the executors. Also smart people (biologist, bank manager) but no matter how much is prepared ahead of time regards where to find figures, what to file, and where to find help, it is easy to imagine that final year return not being filed. There's also the inheritance tax situation for the US which has all sorts of possible complications and again, it's possible it may not go any further than sending funds to the US beneficiaries. Even with advanced IHT planning, most in the UK simply don't understand the US concept of taxation which means consulting with a professional US/UK advisor, although the costs for that greatly reduces the UK inheritance tax as well as the eventual inheritance amounts. If there are complications for the US beneficiaries, at least they understand the situation and are there to handle it.
 

Federal Inheritance tax isn't an issue for me yet and I will definitely be gifting to stay well below that threshold, but state estate tax would be an issue if I died tomorrow. I have a will that leaves my estate equally between my UK heirs and a US lawyer who is executor and they are equal beneficiaries on IRAs etc. But I want to minimize the tax issues for them. My inclination is just to simplify and reduce the estate, but who knows when I will croak. Maybe it's time to see a specialized international estate planner.

Best to have two Wills. One for the U.K. the other for the U.S, being carful to have them written so as not to override the other. The easiest option with regards any IRA etc, is to simply list a beneficiary on the account.

Best to have two Wills. One for the U.K. the other for the U.S, being carful to have them written so as not to override the other. The easiest option with regards any IRA etc, is to simply list a beneficiary on the account.

As I'm not in the UK and the entire estate is in the US I don't think any UK will is necessary, it's just my heirs that are in the UK and there should be no UK inheritance tax/estate issues at all. The difficulties come navigating the tax on things like lumps sums and withholding taxes and just the added paperwork when US institutions have to deal with heirs living in the UK.

Your circumstances are more straight forward due to zero U.K. assets. It’s vital to list all resources separately and hold this document with Will. I’m sure you have an attorney who is an expert in the U.S. & U.K estate tax agreement. This is a complex area. There maybe 30% NRA withholding that can be claimed back with a properly filed 1040NR. I’d be looking at an attorney meeting to structure within the agreement, you’ll then have peace of mind that your U.K. beneficial interest will be properly distributed. A tax attorney maybe an option and give further peace of mind for annual tax reporting and estate planing all in one.

Your circumstances are more straight forward due to zero U.K. assets. It’s vital to list all resources separately and hold this document with Will. I’m sure you have an attorney who is an expert in the U.S. & U.K estate tax agreement. This is a complex area. There maybe 30% NRA withholding that can be claimed back with a properly filed 1040NR. I’d be looking at an attorney meeting to structure within the agreement, you’ll then have peace of mind that your U.K. beneficial interest will be properly distributed. A tax attorney maybe an option and give further peace of mind for annual tax reporting and estate planing all in one.

Right now I just have a regular estate lawyer who can be my executor as having a non US citizen doing it greatly complicates things. I basically want to make things as easy as possible for my heirs and I imagine if they inherit the IRAs or get cash after their sale there will be withholding and they will have to file  US NR tax return to make sure that the right tax is paid. If they keep the IRAs and take income it’s even more complicated. I’m not sure they are up to doing that. So I want to make things as easy as possible and that looks like making gifts before I die and doing IRA to ROTH rollovers.

Right now I just have a regular estate lawyer who can be my executor as having a non US citizen doing it greatly complicates things. I basically want to make things as easy as possible for my heirs and I imagine if they inherit the IRAs or get cash after their sale there will be withholding and they will have to file  US NR tax return to make sure that the right tax is paid. If they keep the IRAs and take income it’s even more complicated. I’m not sure they are up to doing that. So I want to make things as easy as possible and that looks like making gifts before I die and doing IRA to ROTH rollovers.

I think that would be the simplest way, having no tax deferred retirement accounts makes things much easier. The UK recipients of the resulting dispersal from the estate (that receives the value of the IRAs)  simply receive cash with no tax consequences to them. That has happened to my wife with 2 inheritances she received from the UK - a final tax return was done in the UK and then cash was distributed among the recipients, and she just happened to be residing in the USA.

I think that would be the simplest way, having no tax deferred retirement accounts makes things much easier. The UK recipients of the resulting dispersal from the estate (that receives the value of the IRAs)  simply receive cash with no tax consequences to them. That has happened to my wife with 2 inheritances she received from the UK - a final tax return was done in the UK and then cash was distributed among the recipients, and she just happened to be residing in the USA.

For the inherited IRAs I think the taxation passes through to the beneficiary even if they are cashed in by the estate/executor and the beneficiary just gets a cheque. When my mum died in the UK she had ISAs, but there were no tax deferred accounts so it was pretty easy to settle the estate and I also just got cash and I have no tax to pay in US or UK and just had to declare the bequest to IRS, but no tax was due.

For the inherited IRAs I think the taxation passes through to the beneficiary even if they are cashed in by the estate/executor and the beneficiary just gets a cheque. When my mum died in the UK she had ISAs, but there were no tax deferred accounts so it was pretty easy to settle the estate and I also just got cash and I have no tax to pay in US or UK and just had to declare the bequest to IRS, but no tax was due.

Yes, which is why Roths would be easiest I think. If an IRA is passed onto a person with a US brokerage account, like for us to our children, then no tax is payable at the time, the beneficiaries will pay the deferred taxes over the 10 years they have to make distributions on an inherited IRA.  If the beneficiaries cannot receive the IRA as an IRA then it will have to be cashed in and tax paid on the lump sum as part of the final tax return of the deceased. More tax efficient if those IRA distributions are spread out over many years as IRA to Roth conversions.

Yes, which is why Roths would be easiest I think. If an IRA is passed onto a person with a US brokerage account, like for us to our children, then no tax is payable at the time, the beneficiaries will pay the deferred taxes over the 10 years they have to make distributions on an inherited IRA.  If the beneficiaries cannot receive the IRA as an IRA then it will have to be cashed in and tax paid on the lump sum as part of the final tax return of the deceased. More tax efficient if those IRA distributions are spread out over many years as IRA to Roth conversions.

So if the goal is to just make this as convenient as possible for the ultimate beneficiaries in the UK the it would be best to not include them as beneficiaries on the IRAs and just let them pass to the estate and then have the executors sell them and deal with the tax in the final tax return of the deceased.

So if the goal is to just make this as convenient as possible for the ultimate beneficiaries in the UK the it would be best to not include them as beneficiaries on the IRAs and just let them pass to the estate and then have the executors sell them and deal with the tax in the final tax return of the deceased.

It may be worth asking the custodian of your IRAs, “What happens if a named beneficiary cannot receive the IRA as an IRA because they live overseas?”.  The answer may be as simple as it will be cashed out and a check sent to them. I’d certainly want to simplify things for my heirs.

It may be worth asking the custodian of your IRAs, “What happens if a named beneficiary cannot receive the IRA as an IRA because they live overseas?”.  The answer may be as simple as it will be cashed out and a check sent to them. I’d certainly want to simplify things for my heirs.

One issue I don't understand is if the beneficiaries are not US residents, how do the IRAs, ROTHs or general accounts get transferred into their name. The beneficiary would usually open an account and have the account transferred, but if they are not US residents the custodian is unlikely to allow them to open an account.

One issue I don't understand is if the beneficiaries are not US residents, how do the IRAs, ROTHs or general accounts get transferred into their name. The beneficiary would usually open an account and have the account transferred, but if they are not US residents the custodian is unlikely to allow them to open an account.

They can’t open an account which is why the funds including IRAs etc have to be cashed out. When we made our wills in England a few years ago our lawyer mentioned that he hates having to deal with US brokerages to get the money  released to UK beneficiaries and we told him that both our children held brokerage accounts with same US brokerage as us so it should be easier. You are good to be thinking ahead on this.