My mother-in-law (US citizen living in the US) recently passed away.
My wife (Canadian citizen living in Canada, no longer a US citizen) and her siblings (US citizens living in the US) are equal-share beneficiaries of their mother's revocable living trust. The oldest son (i.e. my wife's oldest brother) was co-trustee with his mother and he is now the sole successor trustee. The trust's document states that as of the 90-th day after the time of death, "the trustee shall divide the exempt share into equal shares, creating one share for each living child". It goes on to say that each share created for my wife's siblings "shall be held as a separate trust for such child" and that my wife's share "shall be distributed outright without trust".
At the time of death, the trust consisted of various US stocks. All stocks have now been sold and the trust now contains only cash. Each sibling's share is mid six figures.
My question: What are the tax consequences for my wife?
Canadian resident beneficiary of living trust
Moderator: Mark T Serbinski CA CPA
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formerpatriot
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Canadian resident beneficiary of living trust
FormerPatriot in Montreal
Re: Canadian resident beneficiary of living trust
None.
From the US point of view, she is a non-US person receiving an inheritance from a US-source. Nothing to report., no tax.
From Cdn point of view, she is receiving an inheritance. Period.No tax, other what incoem was generated after the monies became hers. ONly possible reporting is for the period she holds the money in US, she may have to report either the holdings or the income generated by it, on a T1135.
From the US point of view, she is a non-US person receiving an inheritance from a US-source. Nothing to report., no tax.
From Cdn point of view, she is receiving an inheritance. Period.No tax, other what incoem was generated after the monies became hers. ONly possible reporting is for the period she holds the money in US, she may have to report either the holdings or the income generated by it, on a T1135.
After 20 years, I am severely cutting back on responses. Do not ask specifically for my help. There are a few others on this board that can answer most questions. All the best
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formerpatriot
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- Location: Montreal
Re: Canadian resident beneficiary of living trust
A follow-up question:
It is our understanding that the growth that occurs between the date of death and the date of the total distribution of the inheritance to the beneficiaries is considered taxable income. My wife being a Canadian resident and citizen, and not a US person, there will be taxes withheld (for the IRS). Should it be the usual 30%? Does the Canada-USA tax treaty say otherwise. Thank you.
An example to make sure I understand correctly:
Value of estate at time of death: $2,000,000.
Value of estate at time of final distributions to the 4 siblings: $2,040,000.
Each sibling gets $510,000. Only the $10,000 is taxable.
In the case of my wife, there is a 30% withholding (for the IRS) on the $10,000, i.e., a withholding of $3,000.
Is this correct?
It is our understanding that the growth that occurs between the date of death and the date of the total distribution of the inheritance to the beneficiaries is considered taxable income. My wife being a Canadian resident and citizen, and not a US person, there will be taxes withheld (for the IRS). Should it be the usual 30%? Does the Canada-USA tax treaty say otherwise. Thank you.
An example to make sure I understand correctly:
Value of estate at time of death: $2,000,000.
Value of estate at time of final distributions to the 4 siblings: $2,040,000.
Each sibling gets $510,000. Only the $10,000 is taxable.
In the case of my wife, there is a 30% withholding (for the IRS) on the $10,000, i.e., a withholding of $3,000.
Is this correct?
FormerPatriot in Montreal
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formerpatriot
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- Location: Montreal
Re: Canadian resident beneficiary of living trust
P.S.
I think the treaty says 15% withholding on dividends (Article X 2 (b)) and 15% on interest (Article XI 2).
What about capital gains?
I think the treaty says 15% withholding on dividends (Article X 2 (b)) and 15% on interest (Article XI 2).
What about capital gains?
FormerPatriot in Montreal
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formerpatriot
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- Joined: Mon Feb 23, 2015 4:13 pm
- Location: Montreal
Re: Canadian resident beneficiary of living trust
I am also confused about who has to pay the income generated by the investments after the time of death.
You (nelsona) talked about the "income that was generated after the monies became hers". Did the monies become hers (i.e. my wife's) at the time her mother died or will the monies become hers at the time the inheritance is wired to her bank account?
You (nelsona) talked about the "income that was generated after the monies became hers". Did the monies become hers (i.e. my wife's) at the time her mother died or will the monies become hers at the time the inheritance is wired to her bank account?
FormerPatriot in Montreal
Re: Canadian resident beneficiary of living trust
US dividends would be taxed at the treaty rate of 15%. Interest (which is 0% by treaty not 15% anymore) and cap gains would not since when is not a US resident. All would be taxable in Canada. Any improper or or over-withholding would be dealt with on a 1040NR.
The monies become "hers" (the income and any taxes would be her responsibility) upon death of mother.
The monies become "hers" (the income and any taxes would be her responsibility) upon death of mother.
After 20 years, I am severely cutting back on responses. Do not ask specifically for my help. There are a few others on this board that can answer most questions. All the best
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formerpatriot
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- Joined: Mon Feb 23, 2015 4:13 pm
- Location: Montreal
Re: Canadian resident beneficiary of living trust
Follow-up question:
Suppose that the trustee (my brother-in-law) makes full distribution to the 4 beneficiaries and, in the case of the full distribution to my wife, does not bother withholding that 15% on the dividends that occurred after the time of death. Suppose also that my wife files a 1040NR and pays the 15% to the IRS. Under this scenario, is the trustee (my brother-in-law) at risk of trouble with the IRS for his failure to withhold that 15%? My wife's share of the after-time-of-death dividends will probably be of the order of 5,000 USD to 10,000 USD (closer to 5,000 USD in all likelyhood) so that the 15% tax would be of the order of 750 USD to at most 1,500 USD.
For full distribution to be made before the end of 2024, it seems to me that the scenario where there is no withholding by the trustee and my wife files the 1040NR in the Spring and pays the due tax to the IRS is a whole lot simpler. My wife would presumably receive a K-1 form in February or March with the appropriate info.
The scenario where the trustee withholds 15% on the dividends seems much more complicated. He would have to prepare 1042 and 1042-S forms without yet knowing how much dividend there was.
Suppose that the trustee (my brother-in-law) makes full distribution to the 4 beneficiaries and, in the case of the full distribution to my wife, does not bother withholding that 15% on the dividends that occurred after the time of death. Suppose also that my wife files a 1040NR and pays the 15% to the IRS. Under this scenario, is the trustee (my brother-in-law) at risk of trouble with the IRS for his failure to withhold that 15%? My wife's share of the after-time-of-death dividends will probably be of the order of 5,000 USD to 10,000 USD (closer to 5,000 USD in all likelyhood) so that the 15% tax would be of the order of 750 USD to at most 1,500 USD.
For full distribution to be made before the end of 2024, it seems to me that the scenario where there is no withholding by the trustee and my wife files the 1040NR in the Spring and pays the due tax to the IRS is a whole lot simpler. My wife would presumably receive a K-1 form in February or March with the appropriate info.
The scenario where the trustee withholds 15% on the dividends seems much more complicated. He would have to prepare 1042 and 1042-S forms without yet knowing how much dividend there was.
FormerPatriot in Montreal