Canadian inheriting Canadian RRIF owned by US Citizen

[jennie]

Situation:
I am a Canadian living in Canada with no ties to USA. My Step-dad, recently deceased, was a US Citizen and Canadian Landed Immigrant. He lived in California, and had a Canadian RRSP from all his years working in Canada. He converted this to a RRIF when he retired back to California. He created a Revocable Living Trust, (something I have learned is popular in the US to avoid probate), and he put several things into it. Therefore, I am beneficiary to an RRIF located in Canada, and a bank account in the US. I have been trying to figure out the likely tax implications and the process. Is this what will happen?
1. RRIF goes from Canada to US as part of the Living Trust, is taxed by the USA at 25% of its current value due to Dad's status as a US Citizen, non-resident of Canada.
2. As trust beneficiary, (Canadian, non-resident of USA), I had to fill out an IRS form W-8BEN for the executor. Will my inheritance (the Living Trust) then be taxed by USA at 15% (the more favorable tax treaty rate )?
I read on this forum that California does not honour the US tax treaty with Canada? If that is true how can they get away with that since it is an agreement on a National level, doesnt that trump a State level? If so, does it mean that the trust will be taxed 30% because it is unearned income going to a Canadian?
3. Will the US bank account also be subject to the same rate of taxation by the USA (15% or 30%) prior to being distributed to me?
4. Since the RRIF is in Canada, if I am named as the beneficiary for it, could it bypass the Living Trust and go directly to me as it seems that it is going to be subjected to double taxation, to him as a non-resident of Canada, and then to me, as a non-resident of the USA.
Thank you

[nelsona]

This is way out of my ammateur expertise, however Unless you are the deceased widow, you can't really inherit the RRIF, you can only inherit the proceeds from the RRIF, which is considered collapsed at death, and 15% non-resident tax wll be witheld, and you will get the remaining funds.

1. With this trust however, the remaining RRIF funds (minus the 15% for RRIF, not 25%) will simply be rolled into the trust.

2. Dirstibutions from the trust should not be taxable, only the income generated from the trust will be taxed, and you should only be liable for income earned by your part of tyhe inheriatnce after death.. But I see no reason why the trust would be subjest to any extra tax (other than the taxes arising from death -- estate taxes). I don't think there is any treaty issues here, so I would not think califonia rules would matter.
3. US Bank interest is not taxable for non-residents. Aagin, we are only talking about the interest earned after death.
4. Probabaly not. But, again, I don't see any double tax issue her. CRA will get 15%, and that 15% aan be used by the estate towards the US tax (and small cali tax) on the collapse. All thes will be handled by the estate.
At a minimum he should not have included the RRIF in the trust.

[jennie]

Thank you Nelsona. That all makes sense, except maybe I have misunderstood something very basic? Is it not true that the USA takes a withholding tax from any unearned income (including the principal amount of the inheritance) that is distributed to a non-US resident? I thought the reason that the executor had me fill out the W-8BEN was to drop the percentage of that withholding tax from 30% to 15% via tax treaty? So I assumed that when the total value of the estate was figured out, I would get the total principal, minus the withholding tax taken automatically by the IRS?

[nelsona]

I've never heard of this. The unearned income is would be the interest etc that the estate earns after death. Any estate tax would have been paid by the estate, which would only kick-in after about 5 million.

But if indeed you are to pay tax on the ENTIRE amount of your inheritance, then he got AWFUL advice, and the advisor who made him set up that trust should be shot.