Ashford International Law P.C.

Summary

1. A beneficiary who is not a United States person pays no United States estate tax. The estate pays it. What the beneficiary meets instead is withholding on what is distributed, and a fiduciary who is personally liable if it is not withheld.
2. A distribution is not a single item taxed at a single rate. Distributable net income keeps its character, so the distribution has to be decomposed into its classes and each class withheld at its own rate.
3. The treaty rate is claimed on a Form W-8BEN carrying a foreign taxpayer identifying number. Without current documentation the rate is 30 percent, or 24 percent backup withholding where the payee is presumed to be American.
4. Amounts attributable to gain on United States real property are withheld at 21 percent under a separate regime, and an executor who distributes without withholding owes the tax personally.
5. The beneficiary’s own country usually taxes the inheritance in the beneficiary’s hands, and its credit for the United States tax is narrower than families expect.

Part I. The beneficiary does not pay the estate tax

The United States taxes the transfer at the level of the estate, not the receipt at the level of the heir. A German, French or Swiss beneficiary of an American estate therefore has no American estate tax return to file and no American estate tax to pay, however large the inheritance. That is the reverse of the European pattern, where the tax is assessed on each acquirer according to his relationship to the deceased and his own allowance, and it is the first thing to explain to a family that is applying its home country’s mental model to an American estate.

There are two exceptions to the general position, and both arise from the identity of the transferor rather than the recipient. Where the transferor was a covered expatriate, the tax under section 2801 falls on the recipient, but only where the recipient is a United States citizen or resident. And a beneficiary who is himself a United States person has his own reporting obligations, on Form 3520 among others, which are dealt with on gift planning.

What the foreign beneficiary does meet is withholding, and it applies to distributions from American estates and trusts whether the decedent was American or not.

Part II. What a distribution carries with it

An estate or a trust is a conduit for income tax purposes. Income earned by the estate and carried out to a beneficiary in the same year is taxed to the beneficiary and not to the estate, and it keeps its character on the way through: the amounts distributed are treated as consisting of the same proportion of each class of income entering into distributable net income as that class bears to the total (section 662(b), and section 652(b) for a simple trust). A distribution of corpus, by contrast, carries nothing and is not subject to withholding at all.

The practical consequence is that a distribution cannot be withheld at a single blended rate. A payment of $500,000 out of an estate holding American equities, corporate bonds and a rental property, made in a year in which the estate also realised a capital gain, has to be broken into its components: dividends withheld at 30 percent or the treaty rate, interest usually exempt as portfolio interest, rental income depending on whether the net election has been made, capital gain generally not withheld at all, and any part attributable to gain on United States real property withheld under the separate real property regime. Corpus is withheld at nothing. The regulation states the linkage expressly: a complex trust or estate withholds on distributable net income includible in the gross income of a foreign beneficiary to the extent that income consists of an amount subject to withholding and is actually distributed (Treasury Regulation section 1.1441-5(b)(2)(iii)).

Because each class keeps its character, it is the treaty article for that class that fixes the rate, not a single residual article. The firm’s position, and the one it takes in fiduciary files, is that the withholding rate is the article rate for each component of distributable net income: the dividend article for dividends, the interest article for interest, the pension article for retirement income, the real property article for real property income. The argument that the whole distribution is “other income” taxable only in the beneficiary’s country of residence is presented where it belongs, as the beneficiary’s own position at home and as the basis of a refund claim, and not as a reason for the fiduciary to withhold nothing.

Part III. The rates

The table below gives the general portfolio rates for the conventions most often encountered in American estate and trust files, together with whether the same country has an estate tax convention with the United States, which is a separate question and a separate instrument.

Rates are the general portfolio rates from Table 1 of the Internal Revenue Service tax treaty tables and are subject to the footnotes to that table and to the limitation on benefits article of each convention. Real estate investment trust dividends and contingent interest are treated differently. A treaty rate is available only on valid documentation in the fiduciary’s hands before the payment is made.

Two classes fall outside the table. Capital gain carried out to a foreign beneficiary is generally not subject to withholding, because it is not fixed or determinable annual or periodical income, and is generally not taxable to a nonresident individual at all unless he was present in the United States for 183 days or more in the year (section 871(a)(2)). Gain on United States real property is the exception and is covered in Part V.

Part IV. Documentation, which has to exist before the payment

The rate depends on the paper in the file at the time of payment. A beneficiary who produces the form afterwards has to recover the difference by filing an American return, which takes a year or more and is frequently abandoned.

A Form W-8BEN is valid from the date it is signed through the end of the third succeeding calendar year, and a change of circumstances invalidates it earlier. In a long administration the forms expire in the middle of the estate. The fiduciary reports the payments and the tax on Form 1042-S for each beneficiary, files Form 1042 for the year, and deposits the tax on the ordinary schedule.

Part V. United States real property

Where the estate or trust holds United States real property, two withholding regimes can apply and they are frequently confused. If the estate sells the property, the sale is a disposition and the buyer withholds 15 percent of the gross price unless a withholding certificate has been obtained before closing on Form 8288-B (sections 897 and 1445). If the estate instead distributes to a foreign beneficiary an amount attributable to gain on United States real property, the estate itself withholds at 21 percent (section 1445(e)(1)), maintaining a United States real property interest account, reporting on Part II of Form 8288 and issuing a Form 8288-A for each foreign person. Older material still quotes 35 percent for this; the rate follows the corporate rate and is 21 percent.

Part VI. The fiduciary’s own exposure

This is the part that concerns the executor and the trustee rather than the beneficiary, and it is the reason these files are handled carefully.

Every person having control or custody of an item subject to withholding must deduct and withhold, and fiduciaries are named in the statute (section 1441(a)). A person required to withhold is made liable for the tax (section 1461): the liability is primary and personal, not secondary. If the beneficiary later pays the tax the agent escapes the tax itself, but remains liable for interest, penalties and additions (section 1463). Separately, a representative of an estate who pays any part of a debt of the estate before paying a claim of the United States is personally liable to the extent of the payment (31 U.S.C. 3713(b)). An executor who distributes to the family in good faith, and only then discovers the withholding, has made the problem his own, and the money is usually already abroad.

The sequence that avoids this is unvarying: document the beneficiary, characterise the distribution by class, compute and withhold, deposit, report, and only then distribute the net amount. Where a foreign beneficiary refuses to provide a form, the answer is to withhold at 30 percent and distribute the balance, not to distribute in full and argue about it afterwards.

Part VII. Releasing the assets

Where the decedent was neither a United States citizen nor domiciled in the United States, the assets are frozen until the Internal Revenue Service issues a transfer certificate releasing the federal estate tax lien, which the Service states takes twelve to eighteen months from complete documentation. That procedure, and the two routes through it, is described on non-US decedents. Where the decedent was an American citizen or domiciliary, no transfer certificate is required, but the custodian will still want letters from the probate court, and the executor still has to resolve the withholding before releasing anything abroad.

Practical friction is worth anticipating. Many American custodians will not wire funds to a foreign account at all, and will insist on a domestic account in the estate’s name. Some will not open one for a foreign executor. Others require an apostilled appointment, certified translations and a medallion signature guarantee that European banks cannot provide. These are solvable problems, but each of them costs weeks, and they should be identified at the start of the administration rather than at the moment of distribution.

Part VIII. The beneficiary’s own country is taxing the same inheritance

The relief the beneficiary gets at home is usually narrower than the family assumes.

Germany imposes unlimited inheritance tax on the entire worldwide acquisition where either the decedent or the acquirer is an Inlaender, which covers any person with a residence or habitual abode in Germany and any German national who has been permanently abroad for not more than five years (section 2 ErbStG). A German-resident heir of an American decedent with no German connection at all is therefore taxable in Germany on everything received. The allowances run from 500,000 euros for a spouse and 400,000 euros for a child down to 20,000 euros for anyone outside the family, with rates to 30 percent in class I and 50 percent in class III, and gifts from the same person within the preceding ten years are aggregated (sections 14, 15, 16 and 19 ErbStG). The unilateral credit for foreign inheritance tax applies only in unlimited liability cases, only to tax actually assessed and paid, only against German tax on assets falling within the statutory catalogue of foreign property, and only where the German tax arose within five years of the foreign tax (section 21 ErbStG). American bank deposits, in particular, may fall outside the qualifying categories, so tax paid on them can be left uncredited. Where the convention applies it governs instead.

France taxes the worldwide transfer where the decedent was domiciled in France, and also where the heir or legatee is domiciled in France on the day of the transfer and has been for at least six of the ten preceding years (article 750 ter of the Code general des impots). A recently arrived French resident who has not accumulated six of the last ten years is outside that head. Prior gifts from the same person are brought back over fifteen years (article 784), and foreign transfer tax is creditable only against the French tax attributable to the foreign-situs assets (article 784 A).

Where no convention covers the position, the two taxes can overlap without full relief, and the sequence in which the returns are filed determines how much of the credit is actually obtained.

Part IX. Practical steps

1. Identify every beneficiary’s status at the start of the administration, not at the point of distribution, and obtain the forms then.
2. Characterise the estate’s income by class each year, so that the withholding on any distribution can be computed rather than estimated.
3. Do not distribute before withholding. The exposure is the fiduciary’s own and it survives payment by the beneficiary.
4. Treat capital gain and corpus separately from income. Withholding the whole distribution at 30 percent is as wrong as withholding nothing, and it creates a refund claim the beneficiary may never pursue.
5. Diarise the expiry of every Form W-8BEN, which is the end of the third year after signature.
6. Open the transfer certificate file early where the decedent was a nonresident, and tell the family the twelve to eighteen month figure at the outset.
7. Test the custodian’s payment mechanics before promising a distribution date.
8. Coordinate with the beneficiary’s own adviser so that the foreign return claims the credit correctly and within its own limitation period.

Conclusion

For the beneficiary the American system is counterintuitive in one direction and unforgiving in another: no estate tax on the receipt, and then a withholding regime that reaches the distribution, a documentation requirement that has to be satisfied in advance, and a home country that taxes the same inheritance with a credit that may not cover it. For the fiduciary it is simply a liability question. Everything turns on doing the analysis before the money moves.

How the firm helps

Ashford International Law PC advises executors, trustees and foreign beneficiaries on distributions out of American estates and trusts: characterising distributable net income by class, applying the correct treaty article to each component, assembling the W-8 file and obtaining identifying numbers, computing and reporting withholding on Forms 1042, 1042-S and 8288, managing the transfer certificate where the decedent was a nonresident, and coordinating the American position with the beneficiary’s own country so that the credit is preserved. Related pages cover US decedents with non-US assets, estate settlements, non-US decedents, asset and tax planning for non-US residents with US assets, estate planning for non-US citizens, gift planning and asset planning using joint titles. Where the decedent left no will, the heirs are determined under the rules described in the overview of statutory succession. The firm’s detailed guides on withholding and fiduciary liability on distributions and on backup withholding, taxpayer identification numbers and the ITIN requirement are on the Articles and Guides page. Defined terms are collected in the Topics A-Z.

This page is intended for general educational purposes and does not constitute legal or tax advice, nor does it create an attorney-client relationship. The matters described depend on the specific facts, the countries and states concerned, and the law in effect at the relevant time. Statuses and figures are stated as of September 2026 and must be confirmed before any decision.