Does the IRS Tax Foreign Inheritances?

For the most part, you do not have to pay federal inheritance taxes when you receive an estate bequest from a foreign source and the assets are also in a foreign country. However, as with many IRS tax issues, this does not mean that you do not have reporting and other obligations.

The foreign bank and financial account (“FBAR”) tax attorneys at Ayar Law in Farmington Hills, Michigan, help individuals comply with all tax reporting and other requirements when they receive a foreign inheritance. When you retain our firm to help you manage the details of a foreign inheritance upfront, you will inevitably avoid costly and time-consuming problems that might be triggered by incorrect reporting.

What IRS reporting obligations will you have when you receive a foreign inheritance?

The reports and IRS forms you need to use will depend on the size and nature of your foreign inheritance and where you intend to retain it:

  • You use Form 3520 when you receive single or multiple foreign bequests that have an aggregate value of more than $100,000.
  • If you leave more than $10,000 of the foreign inheritance in a non-U.S. domiciled bank account, you also need to file FinCEN Form 114; if you transfer more than $10,000 into a U.S. bank account, you will declare that transfer with FinCEN Form 105
  • If the bequest comprises offshore assets with an aggregate value of more than $200,000, you will have to complete and submit Form 8938

These forms and your reporting requirements are for information purposes only. Further, completing and filing them will likely not raise your chances of facing an IRS audit. However, the consequences of a failure to timely file the proper forms can be significant. They may include fines equal to the greater of $10,000 or 5% of the aggregate value of the inherited assets. In every case, you can avoid fines and other adverse consequences by consulting an FBAR Tax Attorney for details about your reporting obligations.

Under what circumstances do you have to pay taxes on a foreign inheritance?

If a foreign citizen gives you property or assets already in the United States, you will pay significant taxes at a rate of 40% of the value of those assets. This often occurs when the bequest is a parcel of U.S. real estate, or some other asset deemed to have a “U.S. situs.” Call a foreign inheritance tax lawyer if you anticipate receiving a U.S.-based bequest from a non-U.S. citizen.

What is the rationale behind the U.S. foreign inheritance tax rules?

The IRS’s rules and regulations follow estate tax principles under which a decedent’s estate will pay taxes on the value of inheritable assets. However, the heirs and beneficiaries of the estate are excused from that liability. In addition, the United States will not levy a tax on an individual or any assets that have no connection in or to the country. Real estate and other assets that have an “in situs” connection, however, are subject to taxation.

With proper planning, an experienced FBAR tax lawyer may be able to shield some of the value of a foreign person’s U.S.-based assets with a trust or some similar structure.

Will you owe state taxes on a foreign inheritance?

Many, but not all states have eliminated estate tax obligations, including foreign inheritance tax liabilities. To verify your compliance with federal and state law, retain an estate and trust tax lawyer who can advise you on how the tax laws of different states will affect your foreign inheritance.

Contact Us for Insights and Assistance on Foreign Tax Inheritance Matters

Contact Ayar Law in Farmington Hills, Michigan, for a more thorough explanation of your reporting obligations. We will guide you through the many forms you may need to file to acknowledge your inheritance. We can also assist you in minimizing fines and penalties if you have already received your foreign inheritance but did not timely or accurately report it.