What Happens if I Inherit Money from Another Country?
With the globalization of the US economy and more individuals from across the globe relocating to the United States to reside as a US person, it is important to have a firm understanding of the US tax implications involved when the person receives an inheritance from overseas. The rules are a bit different for overseas inheritances — and the pitfalls are a bit more dangerous due to the international information reporting requirements for people when they receive inheritances from overseas. While a non-resident alien may not be subject to US tax on their estate (other than US situs), the US person recipient of the inheritance may have certain reporting requirements — and possible tax implications. Let’s go through the basics:
Is the Decedent a US Person or Not?
The first aspect of the analysis is to determine whether or not the person residing overseas with a US person or a foreign person. If the person was a foreign person, then generally there are not many tax implications unless part of the inheritance involves US property. If instead, it is a US person such as a US Citizen or Lawful Permanent Resident who resides overseas, then there is the concern is that the entire state, including both domestic and foreign property, may be subject to certain tax implications. Certain rules involving domicile may apply — as well as tax treaty laws. The reason why this is so important takes us to the next issue, which is reporting the overseas inheritance — and the reporting rules will vary based on whether or not the decedent was a US Person.
Do You Report the Inheritance?
If the person residing overseas with the overseas inheritance was a non-US person, then they are considered a non-resident alien for US tax purposes. Thus, the Form 3520 rules will kick in so that a US person who receives an inheritance from overseas will have to report the inheritance on Form 3520 if the threshold reporting requirements are met. If the inheritance is from an individual, then the threshold requirement is if the total value of the inheritance exceeds $100,000 in one year. Therefore, if the overseas estate transfers seven money transfers of $90,000 each, even though there is no single gift that is above $100,000 the combined value of the overseas inheritance received exceeds $600,000 and therefore it is reported. If the US person fails to properly report the inheritance to the IRS and possibly FinCEN — it may result in significant fines and penalties.
Taxation of the Inheritance
From a baseline perspective if the foreign state is owned by a US person who resides overseas, then the entire value of the estate including both domestic and foreign assets are considered for the estate tax purposes. As stated another way, if a US person receives an inheritance from an overseas relative but that relative is a US person, then that US person’s estate may have to go through US tax and probate protocols — as US and foreign property is reportable. But, the full exemption should apply —
Conversely, if the overseas estate is owned by a nonresident alien who resides overseas, then there are two components to it. The first component is that a foreign person with foreign assets is generally not required to disclose this information to the US government when they pass away. But, as to the portion of the estate that is considered United States situs, there may be probate issues and estate tax issues as to that component — and the general (harsh) rule is that any value above $60,000 may be taxed. There may be some ways to maneuver around these tax rules, if the US person who receives the overseas inheritance for example qualifies for a QDOT.
Working with a Board-Certified Tax Law Specialist
For a US person who receives an overseas inheritance, it is important to speak with a Board-Certified Tax Law Specialist who specializes in these types of international matters, so that the taxpayer can get an understanding of what needs to be done and what the timelines are to avoid unnecessary fines and penalties.
Golding & Golding: About Our International Tax Law Firm
Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure.
Contact our firm today for assistance.