Tax Implications of American Citizen Receiving an Inheritance from Abroad
When an American Citizen is the beneficiary of an inheritance in a will from a foreign relative who does not have US Citizenship, a great number of questions can arise about the tax implications of a foreign inheritance and the logistics of transferring financial interest or ownership of valuable assets over international boundaries. Will I owe taxes on this inheritance from abroad? Are there US Agencies that I need to inform? Will I face any restrictions in claiming ownership of my foreign inheritance?
In this article, we will examine some of the answers to these and other questions. Before we begin it’s imperative for you to understand that foreign inheritances can be quite complex. The intention of this article is to provide basic facts and pertinent information about inheriting money or valuable assets from abroad to empower you to make the most informed decisions. After conducting your own research, you are strongly encouraged to seek professional advice from an international tax professional or estate planning attorney to ensure all tax and reporting obligations are satisfied.
First: Verify the Legitimacy of Your Inheritance Notification
Be suspicious of emails notifying you of a possible inheritance, as there are numerous scams targeting US Citizens. In one common scam, a name of a distant relative (which may or may not actually be one of your relatives) is said to have died in a foreign country with no other heirs besides you. In this scam, you are asked for information about your identity and to provide your financial account details to cover ‘administrative fees’ associated with your ‘inheritance.’ Under no circumstances should you provide any of the information requested in these emails.
For the most part, fraudulent emails such as these are easy to spot. First off, the mere fact that you’re receiving an email without accompanying phone calls or official correspondence should raise some red flags. Second, any cost associated with the disbursement of estate assets can and should be covered by the estate – not the beneficiary. If you’ve received a suspicious email asking you to provide private personal and financial details, make sure to report the activity via links provided at the US Federal Trade Commission.
If you have received notification of a foreign inheritance by email and you believe it to be true, you should take time to verify the legitimacy of the inheritance itself and the executor before sharing any personal information. If you have received a legitimate email, there should be a phone number where you can speak directly to a real person to acquire more information about the owner of the will, the individual who contacted you, and the inheritance itself.
Items such as death records and estate/property taxes are a matter of public record and can be researched to support inheritance claims. If the executor of the alleged will is claiming to be an attorney, there is another piece of information that can be verified – not only through the country’s equivalent to the Bar Association, but through agencies like the FBI and the Better Business Bureau.
Estate Tax and Inheritance Tax Obligations
Taxes are generally imposed on funds and assets listed in a will, and these taxes are charged and collected by the country in which the deceased resided. While the probate process varies from country to country, it is up to the executor of the estate to satisfy all tax obligations imposed by that country’s tax authority before assets are disbursed to beneficiaries.
In the United States, a gift or inheritance which results from a person’s death is known as a testamentary gift. With one exception, the IRS does not impose any estate or inheritance tax obligations onto beneficiaries of testamentary gifts. Furthermore, a testamentary gift is not considered taxable income and should not be included in the determination of such income on Form 1040.
In the previous paragraph, we indicated there is one exception to the taxation of testamentary gifts. That exception is in the event the testamentary gift came from a foreign individual who had once been a US Citizen or Green Card Holder and renounced his/her citizenship. While this is a rare circumstance, it can occur. If you are the beneficiary of a will belonging to such an individual, you will be able to exclude up to $14K (the annual exclusion amount for 2013) but may be required to pay taxes on the rest. Cases involving a renounced citizen or green card holder can be complex and may require additional forms or other responsibilities. If you are involved in such an inheritance, it’s important to seek the advice of a qualified tax attorney or international tax advisor.
Bringing the Inheritance Back to the United States
Generally speaking, the actual process of transferring funds or shipping/carrying personal property to the US is simple. It is important, however, to be aware of the OFAC (Office of Foreign Assets Control) – a US Agency which has financial sanctions in place against certain countries. In most cases there should be no problem or restrictions preventing you from bringing your inheritance to the United States, but it’s important to take the time to research active OFAC sanction programs to make sure that none apply to you. If you are the beneficiary of a will in a country with sanctions, it is recommended to consult an attorney who is well-versed in and has experience dealing with OFAC guidelines.
While there is not much red tape involved with the actual transfer of money or property into the United States, there may be certain reporting requirements if the value of the foreign inheritance exceeds specified thresholds. Failure to adhere to such reporting requirements can result in high fines and – in some cases – criminal prosecution. Listed below are some of the most basic required forms and a brief summary of their filing requirements:
- FinCEN114: This form is also often referred to as FBAR (Foreign Bank Accounts Report). FBAR is a requirement of any US Citizen or Green Card Holder with financial interest in one or more foreign accounts in which the aggregate total is at least $10K. If you have inherited ownership of or signing authority on a foreign account containing $10K or more, you will be required to file FinCEN114. If, however, the foreign estate executor or probate account manager transfers your inheritance directly to your US-based account from a foreign account in which you have no financial interest, you will not be required to file this form. If you do need to file FBAR, your form must be received by the US Department of Treasury no later than June 30; the postmark date rule that applies to your tax return does not apply to FBAR.
IRS Form 3520: This form applies to gifts or bequests valued at $100K or more. It’s important to note that the $100K threshold applies to all gifts and bequests from non-US Citizens in a calendar year; so if you were the recipient of a foreign gift valued at $60K and you received $75K as the beneficiary of a foreign will, you would need to file this form with the IRS. Form 3520 is due on the date when your income tax is due, including extensions.
- FinCEN Form 104: This form is known as a Currency Transaction Report, and it should actually be filed by your bank if your account receives a transfer exceeding $10K. If you’re expecting a large transfer from a foreign account for an inheritance from abroad, take the time to notify your bank of the nature of the transaction so that it’s not reported as ‘suspicious activity.’
- FinCEN Form 105: This form is for any person who wants to physically carry $10K or more in cash across international borders. Whether the cash is being carried by plane or delivered by a an international courier, it must be documented by filling out FinCEN Form 105 and filing it with the Commissioner of Customs. If you are personally carrying the cash, you will need to hand the form to a Customs Officer when you enter the United States.
Remember that the rules and regulations of these reporting requirements are incessantly being altered and updated and there is always the potential for a new form to have been added as a requirement. If you are the beneficiary of a foreign inheritance, it is a wise idea to take the time to review updated reported requirements to avoid stiff penalties. If you need help completing forms or you have questions about your foreign inheritance, Taxes for Expats is only a phone call away.
I.J. Zemelman, EA is the founder of Taxes for Expats