A U.S. citizen or Green Card holder does not have to pay U.S. taxes on an inheritance from an individual living outside the United States. However, there are IRS reporting requirements when receiving an inheritance from a nonresident alien and/or a non-U.S. domiciled person.
Inheriting money or other assets can be a complex process when it involves an international benefactor and/or a foreign legal jurisdiction. Failing to understand your legal obligations can cost you money from an inheritance that is rightly yours.
We Help You Navigate International Inheritance Law
In California, Albertson & Davidson, LLP can help ensure global inheritance laws do not help wrongdoers rob you of your inheritance. Our California will and trust litigation attorneys handle a wide range of matters involving wills, probate, and trusts. We work with abused beneficiaries every day. Our compassionate and skilled legal team has recovered more than $130 million in verdicts and settlements for our probate and estate litigation clients. We offer free consultations. If we can’t take your case, we will refer you to a trusted colleague who can.
Foreign Inheritance Tax: Receiving an Inheritance From a Foreign Country
Typically, the beneficiary of a will in California does not pay taxes on their inheritance. Only a few states impose an inheritance tax, and California is not one of them.
However, there is a federal estate tax that may be imposed on estates of non-residents or non-citizens. For an estate tax to be imposed, the value of the decedent’s taxable estate must meet a value threshold, which is $12.92 million for an individual as of 2023. This exemption is indexed to inflation annually. When imposed, the decedent’s estate pays this tax, not recipients of inheritance or gifts from the estate.
This lack of tax liability is the same for assets from outside of the United States that are willed to a U.S. citizen, Permanent Resident Card holder, or any other U.S. taxpayer.
But the beneficiary of a foreign inheritance will begin to accrue tax liability on inherited assets if they increase in value. Gains on a foreign investment fund will be taxed as income, for example.
If you were to inherit real estate overseas, such as a vacation home, and then sell it, you may be assessed a capital gains tax. Initially, its tax value would be subject to a step up in its income tax basis. A step-up establishes the fair market value of the asset as it would have been on the decedent’s date of death as opposed to what the decedent paid for it. If you sell the asset for more than its step-up value, you will owe capital gains on that increase in value.
Step-up valuations may be applied to inherited stocks and collectibles, changes in private business ownership, and other assets, in addition to real estate.
Reporting an Inheritance From a Foreign Country
All bequests and gifts received by U.S. citizens or residents from foreign persons that exceed $100,000 in value in a calendar year must be reported to the IRS on Form 3520, Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts.
Reporting your foreign inheritance on IRS Form 3520, along with your normal tax filing, is crucial. If the IRS discovers that you have not properly reported a foreign inheritance, the agency may impose a fine of $10,000 or 35% of your inheritance, whichever amount is greater.
Reporting an Inheritance From a Foreign Country that Stays Offshore
If there is reason for your inheritance to remain overseas, you may also be required to file a Report of Foreign Bank and Financial Accounts (FBAR) on Financial Crimes Enforcement Network (FinCEN) Form 114, which is used to report a financial interest in, signature authority, or other authority over one or more financial accounts in foreign countries with assets of $10,000 or more.
Depending on the applicable reporting threshold, you may need to file IRS Form 8938, Statement of Specified Foreign Financial Assets, if your inheritance remains outside the U.S. For example, if you are married, and you and your spouse file a joint income tax return, you satisfy the reporting threshold if the total value of your specified foreign financial assets is more than $100,000 on the last day of the tax year or more than $150,000 at any time during the tax year.
Failure to file either of these forms, if required, could result in penalties. Willful failure to file an FBAR can result in a fine of $100,000 or 50% of the account balance, whichever is greater. Non-willful violations carry a penalty of up to $10,000 per violation. In some cases, criminal charges can also be filed.
Failing to file Form 8938 may result in a $10,000 failure-to-file penalty, an additional penalty of up to $50,000 for continued failure to file after IRS notification, and a 40% penalty on an understatement of tax attributable to non-disclosed assets.
Consult an Accountant or Financial Advisor about Foreign Inheritance Taxes
If you have been fortunate enough to inherit money or other assets from a benefactor in another country, you should not have to pay California or U.S. taxes on your immediate gain, but it must be reported to U.S. authorities.
We would advise you to discuss the impact of any significant windfall on your overall financial standing with your tax accountant or financial advisor. You should also ensure your tax preparer knows you have inherited foreign assets.
Talk to Albertson & Davidson, LLP
The legal team of Albertson & Davidson helps beneficiaries who must wage financial battles over trusts, wills, and probate matters to seek their rightful inheritance. Our team of estate attorneys has extensive experience successfully negotiating settlements and litigating claims involving complex and often emotionally charged legal issues in California courtrooms.
Our firm assists clients throughout the state of California from offices in Los Angeles, Bay Area, San Diego County, Orange County, and Silicon Valley. We offer free consultations, and if we cannot take your case, we will refer you to someone who can.
