Dear Harry,
I am a U.S. citizen. I would like to leave my estate to my brother. He lives outside the United States and has no status in the United States — no Social Security number or green card. My estate consists of cash, stocks, bonds, a Roth IRA and a 401(k) plan. What are my options to leave all of that to my brother, a will? A trust? Something else? What will my brother need to do in order to claim upon my passing considering he isn’t a U.S. person?
Dear reader,
In many ways, the answer is no different from what it would be if your brother were a U.S. citizen living in the United States. You can leave your property to him through a will or trust, or by naming him as beneficiary of your Roth IRA and 401(k) plans.
The main difference has to do with logistics. If you name your brother as beneficiary under your will, your estate will have to be probated. You can name your brother as personal representative of your estate, but the process may work more smoothly if you name someone in the United States to this role. For instance, if papers that need to be signed also need to be notarized, that can be difficult for your brother not being in the United States. He might have to make an appointment at the U.S. embassy or consulate nearest where he lives in order to have such documents authenticated. This would be much easier for U.S.-based personal representative. If you do not have a friend or family member who can serve in this role, you can appoint your estate planning attorney to carry out these duties.
Further, you and your brother may be better off using a revocable trust. This can avoid the need for probate and the additional costs and delay it entails. However, you will still want to appoint someone in the United States as your co-trustee or successor trustee. This has less to do with legalities than with the practices of banks and investments firms. Many restrict what non-U.S.-based owners or trustees may do with their accounts, even if they are U.S. citizens. This may not be a big problem for your brother if he simply wanted to liquidate the accounts, but he probably couldn’t keep them and manage the investments.
While it’s usually easier to name beneficiaries directly on retirement plans, again this could be more difficult for your brother since he’s out of the country. If you named your trust as beneficiary, your successor trustee could manage these accounts on his behalf. The drawback is that the time period for withdrawing the funds from the 401(k) would be shortened from 10 years to five years. As the funds are withdrawn, your brother will have to pay income taxes on them. And since he’s a non-U.S. citizen, the investment firm will automatically withhold 30% of the funds withdrawn. Depending on the size of the account, this could have a smaller or larger impact on your brother’s inheritance. Still, the ease of managing the funds may argue for the quicker withdrawal schedule under a trust despite the acceleration of the tax payment.