Must Beneficiaries be US Residents, Inheritance Tax for Non-Residents, & Death Outside California
We have covered a wide range of topics on our website and YouTube Channel under the umbrella of estate planning - Probate, funding a trust, long-term care planning, taxes and more. We have also received some great questions in the comments on our videos. We try to answer each one, but also figure if one person is asking, then it’s likely someone else has the same question. Today we’re going to tackle questions on whether your beneficiaries can be non-US residents and the tax implications with that. We’ll also address what happens if someone with assets or documents in California dies outside of California.
Can My Beneficiaries be Non-Residents or Citizens of the US?
First is a common question of what can be done about intended beneficiaries living abroad and not being citizens of, or even permanent residents of the US. Are these people eligible to inherit property? The answer is, yes. Even if your intended beneficiary is in a different state or country, they can still be a beneficiary of your estate or even under a transfer on death deed. In fact, we have conducted many trust administrations with beneficiaries located in Mexico and Canada. Going further, we’ve seen beneficiaries located in France, the UK, Ireland and more.
Non-US residents can be beneficiaries in general. However, what about them actually owning, or inheriting, real property? The great news is there are no citizenship requirements to own land here in the US. At this point, the restrictions, or considerations to keep in mind would be whatever the inheritance laws are for where that beneficiary resides, be it another state here in the US or another country entirely. By that, we are mostly referring to taxes, so let’s jump into that next.
What are the Tax Implications for Non-Resident Beneficiaries of a Living Trust?
Jumping into what the tax implications are for non-US resident beneficiaries, there, of course, is no hard and fast rule here. Firstly, we need to consider the type of assets held in the trust or with beneficiaries specifically designated on them. If taxes will be owed due to the type of assets (like an annuity or an IRA for example), then it may be easier to have a trust be the beneficiary. The trust then pays the taxes rather than the individual beneficiary, keeping in mind that the tax rate for the trust may be higher than that of the individual. This would allow for the trust to handle the taxes and paperwork, and the beneficiaries would then only have to worry about receiving the funds and reporting the inheritance on their taxes if their state or country has an inheritance tax.
The only other United States tax to worry about is the estate tax, which is a tax imposed on the decedent’s estate itself only if its value reaches above a certain threshold in value, which is $12.92 million federally starting 2023. Otherwise, the recipient may have some type of inheritance tax in their own country or state, but that will depend on their country’s laws. A handful of US states impose an estate tax, and some impose an inheritance tax.
What if Your Loved One Died Outside of California, but Lived in California?
Lastly, we have the question of what to do if a loved one who lived and had assets in California, died outside of California. This was in context of collecting assets via small estate affidavit and what documentation is needed, but the answer is going to be similar to what if the decedent had a trust in California. To collect money from a bank account valued under the probate threshold, you would provide the bank with a death certificate and a Small Estate Affidavit, signed and notarized. The bank in question will likely have their own version of this Affidavit and a notary on staff. Arguably, the person having passed away in another state means that state may then have jurisdiction over the estate. However, if the property is located in California and that was the decedent’s place of residence, then that should be sufficient to make sure California’s laws regarding small estates will control.
If the decedent had a California trust, then the matter becomes significantly easier. Trusts will, or really should, specify what state’s laws are those governing the trust. There should be a provision in the trust that specifies the controlling law is that of California, for example, so that it does not matter where the trustor died, their trust will always be governed by California law. Thus, when it comes time to wrap up the trust estate, we follow all the laws in California, even if we have a death certificate from Hawaii, for example.
To take it one step further, someone can create a California trust, move to another state, yet still have their trust be under California law. This is actually relatively common. We have quite a few clients who have eventually moved to other states, usually Arizona, Nevada, or Oregon, yet still have their California trust in place. Lastly, yes, you can change the governing law of your trust if you were to move to a different state by simply executing an amendment to the trust saying the new state’s law now apply.
BETHEL LAW CORPORATION
ESTATE PLANNING | ELDER LAW | BUSINESS PLANNING
CLICK HERE OR CALL US AT 909-307-6282 TO SCHEDULE A FREE CONSULTATION.
