What IRS Forms are Necessary When Distributing Share of Estate to Foreign Beneficiary?

 In Estate and Gift Taxes, Probate

Question:

I am the executor of my mother’s estate which calls for her assets to be divided between her five children. My mother’s property has been sold and all distributions will be cash distributions. The value of the estate is approximately $300,000. One of my siblings has lived in Australia for over 30 years and maintains dual citizenship with the U.S. and Australia. I want to know if I must obtain a Form W-8BEN from her? I also read that I may need to file forms 1042, 1042S and 1042T showing the distributions to the foreign beneficiary and the amounts withheld for taxes. How can I determine if I need to withhold taxes , the amount to I would have to withhold and which of these 1042 forms must be completed? Also, if I must withhold taxes, can this amount be taken from her 1/5th share of the estate or must the estate deduct the taxes first and then divide the remainder of the estate five ways?

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Response:

Fortunately, you don’t need to worry about any of these forms for two reasons. First, while your sister has dual citizenship and lives overseas she’s still a US citizen, so she gets treated by the IRS just like the other beneficiaries. Second, distributions of estates are not considered income to the recipients (for the most part), so there’s no income reporting requirements. The one exception to this rule has to do with income earned by the estate while it’s being administered. To the extent that such tax is not paid by the estate itself or not taxable due to deductions due the estate, it may pass through to the beneficiaries and be taxable to them. Given the size of your mother’s estate, if any income does pass through, it will likely be minimal. If there is any, you will have to issue K-1 tax forms to the beneficiaries.

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