Foreign Inheritance Tax
Foreign Inheritance Tax Rules: The concept of Foreign Inheritance Tax has many nuances to it. When a U.S. person receives a foreign inheritance from an overseas estate, one of the first questions they have is whether the inheritance is taxed by the IRS? Generally, a foreign inheritance, from a foreign person — that does not include U.S. situs — is not subject to U.S. Estate Tax (subject to the expatriate gift tax regulations still in flux).
Whether or not a foreign inheritance is taxable will depend on various different factors and has several moving parts to it, including:
- U.S. situs
- Foreign situs
- U.S. inheritance tax laws
- Foreign country tax laws
Whether or not a person has to pay U.S. tax on money or assets they received from a foreign inheritance is a very common question.
We will review the basics of foreign inheritance tax and reporting.
*Even if the inheritance is not taxed, the U.S. person will still have a Form 3520 requirement when the threshold for filing the form is met.
Is There a Foreign Inheritance Tax?
Usually, there’s a very simple answer, which is that you do not pay tax on the receipt of a foreign inheritance.
In general, the U.S. does not tax an inheritance solely because it is foreign.
-If a Foreign Person has U.S. property, there may be inheritance tax on the U.S. assets (situs)
-If a Foreign Person has U.S. property, there is no inheritance tax BUT, the U.S. person recipient may have to file a Form 3520 (reporting requirement)
Why Is There No U.S. Tax on Foreign Inheritance?
The United States follows an estate tax model. That means, that it is the estate that is being taxed and not the inheritance.
Stated another way, it is the money of the person who passed away which is being taxed, and not the actual recipient’s portion of the money that is being taxed.
Therefore, if a non-US person (let’s say a citizen of Taiwan) who has no U.S. status and no U.S. situs passes away and leaves a U.S. person $40 million worth of foreign assets, investments, etc.. then the IRS has no right to tax the assets, etc. of the foreign person, because the foreign person has no relation to the United States.
Likewise, the recipient is not taxed directly on the inheritance. The federal government does not have an inheritance tax, (although some states still do have an inheritance tax), so you’ll want to check with your particular state’s estate tax rules.
All pretty good news, unless the person who passed away also had U.S. situs…
U.S. Situs Changes the Foreign Inheritance Tax Rules
In the prior example above, the person who passed away (a.k.a. the decedent) did not have any U.S. situs, such as land. But let’s say that person also had $3 million worth of US real estate.
Let’s also presume that person did not properly place the land into a trust or other asset protection entity, and that the person presumably owned property directly. When a foreign person (non U.S. Citizen or Resident) owns US property, the default rule when he or she passes away is that only the first $60,000 is exempted from estate tax. This is a far cry from the exemption amount for US persons, which is roughly $5.5 million.
In this situation, if the foreign person decedent also had $3 million of U.S. situs, then any amount over $60,000 may be taxed at 40%.
Therefore, while the foreign assets would pass tax-free, the U.S. situs would be taxed at 40% — which is nearly $1.2 million.
Inheriting Foreign Assets
If you have inherited foreign assets or accounts, it is important that you remain in IRS tax compliance. As you may or may not be aware, the IRS has made international tax enforcement a key priority. And, as a result of the inheritance, you may now have an International Informational Return filing requirement.
Moreover, the penalties associated with failing to remain in compliance are brutal, and can often reach 100% value in a multi-year audit situation in which the IRS believes you are willful.
What Can You Do?
Presuming the money was from legal sources, your best options are either the Traditional IRS Voluntary Disclosure Program, or one of the Streamlined Offshore Disclosure Programs.
Golding & Golding: About our International Tax Law Firm
Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure.
We are the “go-to” firm for other Attorneys, CPAs, Enrolled Agents, Accountants, and Financial Professionals across the globe. Our attorneys have worked with thousands of clients on offshore disclosure matters, including FATCA & FBAR.
Each case is led by a Board-Certified Tax Law Specialist with 20-years experience, and the entire matter (tax and legal) is handled by our team, in-house.
*Please beware of copycat tax and law firms misleading the public about their credentials and experience.
Less than 1% of Tax Attorneys Nationwide Are Certified Specialists
Sean M. Golding is one of less than 350 Attorneys (out of more than 200,000 practicing California Attorneys) to earn the Certified Tax Law Specialist credential. The credential is awarded to less than 1% of Attorneys.
Recent Golding & Golding Case Highlights
- We represented a client in an 8-figure disclosure that spanned 7 countries.
- We represented a high-net-worth client to facilitate a complex expatriation with offshore disclosure.
- We represented an overseas family with bringing multiple businesses & personal investments into U.S. tax and offshore compliance.
- We took over a case from a small firm that unsuccessfully submitted multiple clients to IRS Offshore Disclosure.
- We successfully completed several recent disclosures for clients with assets ranging from $50,000 – $7,000,000+.
How to Hire Experienced Offshore Counsel?
Generally, experienced attorneys in this field will have the following credentials/experience:
- 20-years experience as a practicing attorney
- Extensive litigation, high-stakes audit and trial experience
- Board Certified Tax Law Specialist credential
- Master’s of Tax Law (LL.M.)
- Dually Licensed as an EA (Enrolled Agent) or CPA
Interested in Learning More about Golding & Golding?
No matter where in the world you reside, our international tax team can get you IRS offshore compliant.
Golding & Golding specializes in FBAR and FATCA. Contact our firm today for assistance with getting compliant.