Foreign inheritance questions if anyone here knows

[dvalley]

My elderly parent (living thankfully!), who lives abroad and is not a US resident/citizen, asked me what would be the best method to allocate inheritance to me i.e. real-estate/property or cash. I had no clue, nor did I ever think I would receive any to be honest as my siblings deserve it more than me for taking care of our parents for the last 15+yrs where I on the other hand have really only been a visitor due to my family relocating to the US. However, I was told that's their wish, for me to also be part of the inheritance.

Anyway, so my quick research shows that cash is probably the easiest as opposed to say a house/apartment/gold etc. I also understand there's no tax on inheritance. However, on that point what is considered inheritance vs. say a gift? does the inheritor have to be deceased?

 

[Sunset]

How nice.

Did they give any idea of the amount (pretty crass eh?) as that would help the discussion a lot !

A key point is the giver is not a US citizen. Possibly there are very high or no limits due to this but I'm unsure.

It may not matter as "For 2018, the annual exclusion is $15,000." per person.
https://www.irs.gov/businesses/smal...oyed/frequently-asked-questions-on-gift-taxes

So a gift per year of this amount is not taxable by anyone.


Inheritance is when the giver (your parent) is dead and you get something due to their death. Often this is all described in a Will they have made. Of course you have to be alive to receive the inheritance.

If you get an inheritance (after parent dies) then there will be no tax on it (I think) as they are not citizens and live in another country. Besides the estate tax limit is around $5 Million USD which is more than most folks ever inherit and it's the Estate (dead person) that has to pay the tax, not the person that gets the $$.

 

[43210]

You pay no tax to receive either gift or inheritance.

Also a non-US-person, pays no US tax at all.

So the only issue, I would think, are taxes in your (family's) home/original country (until you receive the assets and they produce income).

Some examples I can think of (for your non-US country):

How are unrealized capital gains at death treated?

How do taxes work when a house (or other asset) is sold later (at which point you have tax issues in two countries, possible double taxation, and lots of paperwork)?

 

[canuck5]

You'll pay no US inheritance taxes (under $5MM) The estate in "that" country will have to likely pay any taxes or capital gains the estate owes, before money is distributed.

If you deposit your inheritance in a bank, in "that" country and earn interest, you will have to file FBAR forms and pay US tax on that interest (annually), and maybe to "that" country as well, unless there is a reciprocal agreement between the US and "that" country. If you leave the money in "that" country, you might be subject to exchange rate risk, going up or down. If it's a great amount of money, more than $50,000 US, there will be additional forms that will have to be filled out (annually).

If you get the money and wire transfer it to the US, additional IRS forms will have to be filled out, but once and done.

If you inherit real estate, keep it for a period of time and sell, you will have to pay capital gains on it, whether to "that" country or the US, would have to be determined at that time. The US won't tax you twice, but they will take from you what they "deem" a fair tax would've been in the US.

All the laws do change and it will be important to have an accountant in "that" country who is familiar with US tax laws or willing to communicate with your accountant (if you have one) here in the US.

It can get complicated, but hiring a professional is a good thing.

 

[canuck5]

FBAR https://www.irs.gov/businesses/smal...t-of-foreign-bank-and-financial-accounts-fbar

 

[canuck5]

Form 8398 for large amounts https://www.irs.gov/businesses/comparison-of-form-8938-and-fbar-requirements

 

[trirod]

No tax consequences but you do have to report foreign gifts > $100,000 on Form 3520 (separate from your tax return). Since Form 3520 is a foreign reporting information return it has stiff penalties for non-compliance, so make sure you do this. Also the FBAR's as others have mentioned if you receive the funds in the foreign country (even if just temporarily before transferring to the US).

 

[dvalley]

Thanks all for the responses. A few answers and a few more follow up questions. I don't know the amount, nor do I want to ask! If I were to take a wild guess it'd be around $100k-200k. I think the parents want to disburse the inheritance while still alive that's why I was asking what's considered inheritance vs. gift. However, based on @43210's response one doesn't have to pay US tax in either case, is that correct?

Another sidebar question, from this discussion, why should a govt care (US or any other) if you were gifted/inherited say an apartment/stocks that has cap gain and/or rental income in a foreign country? Because you'd be paying taxes in that foreign country so what does reporting it matter? Just because, as in big-brother?

 

[trirod]

Another sidebar question, from this discussion, why should a govt care (US or any other) if you were gifted/inherited say an apartment/stocks that has cap gain and/or rental income in a foreign country? Because you'd be paying taxes in that foreign country so what does reporting it matter? Just because, as in big-brother?

Because as a US resident you are also subject to tax in the US on the income generated in the foreign country. The joys of a worldwide taxation system!

So if possible, avoid any income generating assets in a foreign country - they really trash up your tax return (ask me how I know...)

 

[canuck5]

Thanks all for the responses. A few answers and a few more follow up questions. I don't know the amount, nor do I want to ask! If I were to take a wild guess it'd be around $100k-200k. I think the parents want to disburse the inheritance while still alive that's why I was asking what's considered inheritance vs. gift. However, based on @43210's response one doesn't have to pay US tax in either case, is that correct?

"Gifting" up to the $15,000 limit .... inheritance, is different.

 

[dvalley]

Ah ok, thanks. Someone above said US won't double tax you which I took to mean you don't pay taxes on foreign income if you pay them to the foreign govt but sounds like that's not the case.

I was reading up on the FBAR and 3520 forms, as well as this: https://www.irs.gov/businesses/gifts-from-foreign-person

Sounds to me that the easiest way would be to ask them to wire-transfer directly from their account to mine and then I fill out just the 3520 form AFTER the funds arrive in my account? Supposedly you file 3520 during the current tax year, I'm not 100% clear on this but I assume it means that if I receive the gift in the year 2018 I'd file Form-3520 next year when I file my 2018 taxes? The instructions for form-3520 say you may have to file other forms like form 706 or 709 depending on if it's a gift or an inheritance. It's like a rabbit hole!

If I were to hire someone to help with this who should I be looking for? i.e. a tax/CPA who deals with foreign taxes or an estate planner?

 

[dvalley]

"Gifting" up to the $15,000 limit .... inheritance, is different.

On this https://www.irs.gov/businesses/gifts-from-foreign-person page it says:

Form 3520 is an information return, not a tax return, because foreign gifts are not subject to income tax. However, there are significant penalties for failure to file Form 3520 when it is required.

Looks like foreign gifts aren't subject to tax, only local gifts are.

 

[canuck5]

Another sidebar question, from this discussion, why should a govt care (US or any other) if you were gifted/inherited say an apartment/stocks that has cap gain and/or rental income in a foreign country? Because you'd be paying taxes in that foreign country so what does reporting it matter? Just because, as in big-brother?

The US government will want to make sure that the pound of flesh is taken from you. If a pound is to be taken and a foreign government takes a pound and a 1/2, the US will (likely) leave you alone, since you paid more than you would've, had the property/bank account/income been in the US. But all the proper paperwork has to be filled out. (Someone more knowledgeable can correct me here if I am wrong)

If the foreign government only takes a 1/2 a pound, the US will come after you for the other 1/2 that they feel you would've/should've paid in the US.

I have money in Canada and I pay taxes on all of my earnings in Canada, to the US government and that's because the US and Canada have a reciprocal agreement. Canada doesn't tax me. I file no tax returns up there. Maybe there is that same agreement with "that" country, as well?

This will be all while you ride the exchange rate roller coaster.

 

[fosterscik]

I've done this twice. My mom (UK) and DW's dad (Canada) left bequests. Filled out form 3520 both times. Nothing ever returned from the IRS, not even an acknowledgement. No taxes due as stated above

 

[canuck5]

On this https://www.irs.gov/businesses/gifts-from-foreign-person page it says:



Looks like foreign gifts aren't subject to tax, only local gifts are.

Perfect!!!!!!!! But you can call them and verify, just to be sure, of your circumstances.

 

[canuck5]

I've done this twice. My mom (UK) and DW's dad (Canada) left bequests. Filled out form 3520 both times. Nothing ever returned from the IRS, not even an acknowledgement. No taxes due as stated above

Easy and simplest way to go!

 

[dvalley]

I've done this twice. My mom (UK) and DW's dad (Canada) left bequests. Filled out form 3520 both times. Nothing ever returned from the IRS, not even an acknowledgement. No taxes due as stated above

Sounds easy-peasy then! But also, what was the form of bequest? cash or other property that you had to convert to cash? How did you transfer the money? bank to bank wire-transfer I assume? Thanks!

 

[USGrant1962]

On this https://www.irs.gov/businesses/gifts-from-foreign-person page it says:

Looks like foreign gifts aren't subject to tax, only local gifts are.

To be clear, in the U.S. gifts in any amount are not taxable to the recipient as long as they are really gifts (e.g., not a promotion from a company). Doesn't matter if they are foreign or domestic. The "gift tax" applies to the giver above certain exempted levels.

 

[fosterscik]

Sounds easy-peasy then! But also, what was the form of bequest? cash or other property that you had to convert to cash? How did you transfer the money? bank to bank wire-transfer I assume? Thanks!

Both were cash transfers. They were the proceeds after the estates were settled in the foreign countries. Funds were wired to my local bank account using the usual swift system.

 

[audreyh1]

I’ve wondered what the situation is for an expat living in Europe and inheriting US assets. But I don’t know where to look.

 

[43210]

The US government will want to make sure that the pound of flesh is taken from you. If a pound is to be taken and a foreign government takes a pound and a 1/2, the US will (likely) leave you alone, since you paid more than you would've, had the property/bank account/income been in the US. But all the proper paperwork has to be filled out. (Someone more knowledgeable can correct me here if I am wrong)

If the foreign government only takes a 1/2 a pound, the US will come after you for the other 1/2 that they feel you would've/should've paid in the US.

That is absolutely not how FTC works. You can definitely be double taxed. (Also you probably pay full state tax no matter what.)

 

[trirod]

Ah ok, thanks. Someone above said US won't double tax you which I took to mean you don't pay taxes on foreign income if you pay them to the foreign govt but sounds like that's not the case.

I was reading up on the FBAR and 3520 forms, as well as this: https://www.irs.gov/businesses/gifts-from-foreign-person

Sounds to me that the easiest way would be to ask them to wire-transfer directly from their account to mine and then I fill out just the 3520 form AFTER the funds arrive in my account? Supposedly you file 3520 during the current tax year, I'm not 100% clear on this but I assume it means that if I receive the gift in the year 2018 I'd file Form-3520 next year when I file my 2018 taxes? The instructions for form-3520 say you may have to file other forms like form 706 or 709 depending on if it's a gift or an inheritance. It's like a rabbit hole!

If I were to hire someone to help with this who should I be looking for? i.e. a tax/CPA who deals with foreign taxes or an estate planner?

You will get a foreign tax credit on your US return based on the amount of tax you paid to the foreign country, but because of the mechanics of how this works, you often end up paying some additional tax in the US, even if you already paid tax at a rate equal to or higher than your US tax rate.

If you receive the gift in 2018 then you will file a 2018 Form 3520 at roughly the same time you file your regular US tax return (I don't recall if the due date of the 3520 is 3/15 or 4/15).

Get a CPA that specializes in foreign tax issues to help - the Form 3520 is simple, but I think it would be worth having a pro look it over and checking on other issues that might have arisen.

 

[dvalley]

Very helpful discussion, thanks for all the info folks! One other minor question that popped in my head...what if you receive $50k in 2018 and $60k in 2019 and perhaps another $30k in 2020 do you have to file 3520 for 2019 and 2020 because by then you received more than the $100k (threshold for reporting on 3520)? Or does the $100k threshold apply per year?

 

[Bamaman]

FYI: We have a young relative who is living in Europe. She got around the Schengen Agreement and 90 days maximum visitation by obtaining a German passport. Although her grandmother sailed into Ellis Island 11/1939, she kept her German citizenship. For that reason, her granddaughter could obtain a German passport. Their German assets no longer exist--taken by Hitler's administration.

 

[kramer]

To be clear, in the U.S. gifts in any amount are not taxable to the recipient as long as they are really gifts (e.g., not a promotion from a company). Doesn't matter if they are foreign or domestic. The "gift tax" applies to the giver above certain exempted levels.

yeah, even for large gifts, the giver fills out a tax form which reduces their lifetime estate tax exemption ... so they don't pay tax on it currently until over 5 million or whatever. But each gift you are giving over the 15K to one person is reducing your lifetime estate tax exemption.