(Risk of) inheriting PFICs

Hi everyone

Having done a search, I've found several posts about inheritance tax, but not about how to best deal with the potential inheritance of a whole bunch of PFICs.

I'm a UK citizen, and a US permanent resident, currently living in the US, with no intent to change that in the forseeable future.

Sadly within the next 12 months I expect that I'll be the beneficiary of my remaining UK parent's will. My Dad is a UK citizen, living in the UK, and has a modest amount of financial assets - mainly unit trusts, held in an ISA. To keep things simple for this post, let's assume both I and my UK based sister are 50:50 beneficiaries.

It suddenly struck me that I am likely to inherit a whole bunch of PFICs. I'd obviously like to avoid, as far as possible, the associated PFIC calculations/filings (been there once, have no desire to go there again), the cost of any tax advice to help prepare that paperwork ($200-$300 per PFIC would be material to the value of the investments), and to a lesser degree, any prohibitive income tax on the assets post inheritance but prior to disposal.

Before I start my research, has anyone else explored any strategies to minimize the above e.g. the estate selling my share of PFICs prior to probate being granted/assets being transferred etc.?

Unfortunately there is no option of my Dad changing his assets/will, as he's no longer of sound mind. My sister has financial power of attorney for him, but switching the assets out of unit trusts would I think be hard to justify as in the best interests of my Dad, and probably not in the best interests of her as the other beneficiary either.

Dealing with a parent's death and their estate is tough enough, without having to deal with PFICs, so any ideas would be gratefully received!

Incidentally, in case anyone else thinks of it, I'm not an executor of the estate, specifically to avoid having any issues with FBAR and signature authority over estate assets.

Many thanks
Martin

I think you may want legal advice; but if the Estate is indeed a separate "person" while in administration and the assets are sold before being appointed to you; you may avoid the problem. Also, subject to the terms of the Will could PFICs all be passed to non-US beneficiaries and you take, say, cash instead?

This link might help explaining rules

https://hodgen.com/what-is-the-heirs-basis-in-a-pfic-inherited-from-a-nra/

Thank you - both helpful posts.

Guya - you may be right that under the terms of the will, whilst there might be a 50:50 distribution (say), I'm not sure that necessarily means 50% of each of the individual assets. There are likely to be some non-PFIC assets that would cover 50%, so that may well be an option.

Otherwise your observation about selling them before grant of probate may be worth investigating.

Same Boat - thank you for the link. Also very helpful if I need to go down that path!

Martin

When my mum died the executor of her estate (the family lawyer) disposed of all the assets and simply wired the proceeds to my US bank account. There was a house sale, PFIC sales, etc and all I did was to file an FBAR for the year the estate was in probate and a 3520 Part IV for the year I received the inheritance. So there was no US tax to pay, just the informational forms.

For UK tax purposes, a key date is the end of the administration period. Broadly this is when the residue of the estate can be ascertained. You can see more detailed comments about this in HMRC Manuals at CG30700. See
https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg30700

Sales in the period from the date of death to the end of the administration period are taxed on the personal representatives (of, in Scotland, the executors). Later sales are treated as being made on behalf of the beneficiaries, who are liable for any UK tax on them.

The PRs only gain title to the assets of the deceased when probate is obtained. It is unlikely that the ISA manager would except sale instructions in advance of seeing the probate grant.

PRs will generally have wide powers to administer the estate. So, for instance, they might sell 50% of the shares to pay cash to Martin, but transfer the other half in specie to his sister, if this was what she wished, or mix and match in a suitable way.

When my mum died the executor of her estate (the family lawyer) disposed of all the assets and simply wired the proceeds to my US bank account. There was a house sale, PFIC sales, etc and all I did was to file an FBAR for the year the estate was in probate and a 3520 Part IV for the year I received the inheritance. So there was no US tax to pay, just the informational forms.

+1
We have had 3 such inheritances from parents and a family member dying and naming us in the will.  In each case all assets were sold by the executor and then distributed as cash. When my mother died in 1995 I helped Dad modify his will and in doing so told him to change the executor from myself in the USA to one of my sisters living in England. Apart from a house to sell his affairs were straightforward, but I still didn't want the added complexity of managing it from overseas. My sister did a splendid job when the time came, some 15 years later.

The other 2 estates we inherited from were more complex but in each case it was a law firm that handled it.

Thanks for the additional posts - very helpful.

It seems like the best course of action for me will depend on

i) Whether "ascertaining the residue of the estate" occurs only once tangible property (house, contents etc.) are sold and the value known, or whether it's once all debts and assets (liquid or otherwise) are known with reasonably certain values; and
ii) Whether the US treatment of the above is similar to the UK treatment

If administration only ends after the property is sold, it won't be a problem as I can work with the executor to convert my share of assets to cash. If it ends before, I can probably make arrangements for the PFICs to be deemed to be assets of the other beneficiary.

It looks like there are some UK tax implications attached to this as well, due to the way income and capital gains are treated before and after administration ends, but tax efficiency is a different question!

More research needed - but thanks for the pointers, so I know what to focus on!

Martin

For UK tax purposes, broadly, the residue is ascertained when all the assets and liabilities are known. HMRC Manuals, starting with the paragraph noted above, have several paragraphs that further expound on this area. 

This is not related to sales of assets. But generally PRs would not transfer assets to beneficiaries before the residue is ascertained.

+1
We have had 3 such inheritances from parents and a family member dying and naming us in the will.  In each case all assets were sold by the executor and then distributed as cash. When my mother died in 1995 I helped Dad modify his will and in doing so told him to change the executor from myself in the USA to one of my sisters living in England. Apart from a house to sell his affairs were straightforward, but I still didn't want the added complexity of managing it from overseas. My sister did a splendid job when the time came, some 15 years later.

The other 2 estates we inherited from were more complex but in each case it was a law firm that handled it.

I also made sure that I was not the executor of my Mum's estate and agreed with my brothers to just have the solicitors do it. In the end it was the best thing to do as they dealt with all the paper work, probate and the house sale etc at a time when none of us really wanted to deal with it. Their fees ended up as 2% of the estate's value.

Mum had made an inventory of specific bequests like jewelry and antiques and we distributed those at the funeral along with other household items. Some of the Utility and the G-plan furniture went to family members and then I gave the rest of the household contents to charity. The hardest thing to do both physically and emotionally was to clear the house out to get it ready for sale. But I'm glad we left the details to the solicitor and simply getting a check from the executor at the end of things eliminated the possibility of issues like PFIC.