US estate and income tax treatment of an inherited UK retirement accounts. Expatriation considerations


If you are a US citizen and if you have recently inherited the UK retirement plan of a close relative or in fact anyone who decided to bequest that to you, you certainly need to consider the US estate and income tax consequences, as those may not be as straight forward as you might expect.


Estate Tax:

In general, US qualified retirement plans, such as IRAs and other employer-sponsored survivor benefit plans, including annuity and deferred compensation arrangements, are included in a decedent's estate under Code Section 2039. Since a typical SIPP or another UK retirement plan are treated as a qualified retirement plans under the US-UK tax treaty, then those assets included in the estate, but there is no step up in basis for the beneficiary.  


Income Tax:

Assets in a decedent's estate which would have been subject to income tax had the decedent lived constitute "income in respect of a decedent" (IRD). Taxable distributions from qualified retirement plans and IRAs, and taxable gains in deferred annuity contracts are treated as IRD under Code §691. (There is no step-up in basis under IRC §1014 with respect to such assets.) 


Interplay between trust and estate tax rules:

Though qualified retirement plans, IRA’s and SIPP’s are grantor trusts subject to special income deferral rules during the lifetime of the settlor, at death they become non-grantor trusts. The assets are subject to estate tax and included in decedent’s estate because the initial contribution was treated as incomplete gift for gift tax purposes.


The beneficiary has three options:

  1. take a full distribution in order to transfer the assets under her name,
  2. take periodic distributions, or
  3. In case beneficiary is spouse, beneficiary may rollover an IRA in her name.  The question is whether such a rollover option is available for a SIPP from a UK perspective. From a US perspective the IRS has issued an information letter 2010-0151 allowing a US taxpayer to rollover another UK retirement plan into a UK SIPP tax free.


If beneficiary chooses to take periodic distributions from the inherited retirement account, then the plan is treated as a non-grantor trust.  An inherited SIPP would be treated as a non-grantor foreign trust.

If beneficiary could rollover the inherited SIPP assets into a SIPP in her name, the retirement account will become a grantor trust.


“Death in Service” Benefits Paid Into a Pension Plan:

Special attention is needed when a US person inherits the decedent’s pension plan into which a life insurance policy known as “death in service” policy has been deposited.   Generally, life insurance proceeds are excluded from income under IRC Sec 101(a), but if the insurance is paid to a pension fund and then distributed to a beneficiary, the Section 101(a) exclusion does not quite work. Instead, Sec 72(m)(3) and Treas. Reg. 1.72-16(c) will apply and the bottom line is that only the excess between the cash surrender value of the policy at the date of death over the amount actually paid would be a tax free from a US perspective.



Finally, in the light of the fact that more and more Americans choose to give up their US citizenship, it’s worth mentioning that for the purpose of expatriation, an inherited retirement account treated as non-grantor trust would not be a covered asset and will be exempt from exit tax, but any subsequent distributions would be subject to 30% withholding tax.


As an alternative, the beneficiary may elect to include the entire value of the non-grantor trust as part of exit tax base. That would require an application for a private letter ruling. That may substantially delay the expatriation process.

If beneficiary could transfer retirement account in her name, and treat it as a grantor trust, then the entire value of the account would be subject to exit tax.



The treatment for estate and income tax purposes depends on the specific facts and may vary depending on how the retirement plan assets are transferred from the decedent to the beneficiary. We recommend you consult a tax advisor to determine how the rules apply to your particular situation.


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Disclaimer: The content of this page does not constitute legal advice, and should not be relied upon for tax avoidance purposes. The facts and circumstances specific to your situation are the ones that ultimately determine the application of the rules. The text above is based on Taxential's interpretation of the US tax law from a general perspective only.


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