One of the most common questions we are asked is about the tax implications of inheriting property or assets from a foreign country.
Under most circumstances, you will not pay tax on the receipt of an inheritance from abroad - but you still may have to report it!
The short answer is that if you are a US person (US Citizen or Resident Alien) and you are receiving inheritance from a non US person (Non Resident Alien) who is abroad and the assets are based outside the US (non-US-Situs), the US will not impose taxes on you as the recipient, nor on the estate of the deceased.
Related Article: Do Aliens Pay Taxes?
A caveat if the assets are US-Situs
If a foreign individual owns US property and passes away, the US-Situs portion of his or her estate will be taxed heavily. The Executor of the estate must file Form 706-NA and 40% estate taxes (in 2018) will be levied on any amount over $60,000. This is different from the way estate taxes are levied on US persons - the lifetime exemption here is $11.18 million.
State inheritance taxes may still apply
Depending on the state you live in, you may owe inheritance taxes (to be paid by you, the beneficiary) on inheritance from a foreign source. It’s best to check with a local estate attorney or accountant. Does your state have an inheritance tax?
Related Article: Estate and Inheritance Taxes Are More Complicated for Immigrants
You may still to report it!
You will need to file Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts, with the IRS if you received: (1) Gifts or bequests valued at more than $100,000 (2020) from a nonresident alien individual or foreign estate or (2) Gifts valued at more than $16,388 (2020) from foreign corporations or foreign partnerships. Form 3520 is not a tax return, but an informational return. It’s due on the same date as your personal income tax return.
Do not ignore it since the IRS enforces a 35% financial penalty for failure to file a complete and accurate report. The penalty is based on the gross value of the gift or inheritance.
If you are a U.S. person (including a Resident Alien) who is the owner of any portion of a foreign trust, you must provide information about the trust and its U.S. beneficiaries by filing Form 3520-A, Annual Information Return of Foreign Trust With a U.S. Owner. Similar to Form 3520, Form 3520-A is an informational return. It must be filed by March 15th of each year. A penalty of 5% of the gross value of assets may be assessed for failure to file.
FinCEN Form 104
If you move your inheritance into a US bank account, you need to complete a US Treasury FinCEN Form 104. Be sure to be transparent with your bank about why you’re depositing this money - the bank and the Treasury are trying to prevent money laundering. Use Form 105 if you’re carrying it in cash.
A few more forms might be required
Do you now have a financial interest in or signature authority over financial accounts located outside the United States that exceeded an aggregate amount of $10,000? If so, then you may need to electronically file a Report of Foreign Bank and Financial Accounts, FinCEN Form 114. File the report with the United States Department of Treasury. Filing exclusions may apply. You may also be subject to filing requirements of Form 8938, Statement of Specified Foreign Financial Assets, if you have an interest in foreign financial assets which exceed a predetermined threshold based on your marital status and amount of foreign assets - thresholds detailed on this IRS page.
Due to the ongoing changes in federal and state tax laws in the United States, please consult with an attorney or qualified professional for details on how to handle your specific situation. The information shared in this article is not intended nor a substitute for legal or tax advice from a qualified professional.
If you inherited property or assets from abroad, there are some additional considerations you should keep in mind
- You will need to pay taxes on income from those assets (such as investment income). Foreign tax paid on that income may be deductible or creditable on your US taxes
- If you inherited real estate or property, you may want to engage with a local attorney or property manager to help you manage or sell the property