International Inheritance Tax Considerations for US Expats
Expats are required to file US taxes wherever in the world they live, reporting their worldwide income. While the tax treaties that the US has with around 100 other countries don’t mitigate this requirement, when expats file they are able to claim a number of exemptions such as the Foreign Tax Credit and the Foreign Earned Income Exclusion that (for the majority of expats) relieve them from US tax liability (though not from the requirement to file an annual federal return).
What happens when an expat inherits an estate though? International inheritance can be complex, however for the majority of Americans, it doesn’t have to be, from the US perspective at least.
International inheritance taxes
Inheritance Tax (or Estate Tax) is normally payable either in the country where the estate is located, or in the country where the deceased was residing or domiciled. Often these are the same country, however things can get more complicated when mulitple countries are involved, so for example if a person living in France leaves an estate in Italy to a US tax payer.
If the deceased was a US tax payer, then their worldwide estate is subject to US estate tax. However, because the exemption is very high ($11.2 million per person currently, since the Tax Reform), few Americans pay it, and those with assets over this value normally anticipate it and take steps to mitigate it.
If the deceased was living or had assets in a foreign country, whether they were a US tax payer or not, then an estate or inheritance tax may be due in those countries. US expats who inherit from someone living or with assets abroad should seek trusted local help in that country to help them navigate the inheritance tax and any other relevant laws there.
International inheritance reporting implications
“The good news is that international estate planning isn’t as difficult as it may seem. But it does require a pro-active approach.”
– The Globe and Mail
While most US expats who inherit an estate won’t owe any US estate tax, there are US reporting requirements that can come into play.
For example, if a US expat inherits any foreign-based financial accounts, whether brokerage or bank accounts (or any other accounts with a nominal positive cash balance), if the total value of the combined balances of all the expat’s foreign financial accounts exceeds $10,000 at any time during a year, they will have to report all their foreign accounts by filing an FBAR (Foreign Bank Account Report). If an expat has offshore financial assets worth over $200,000 in total, they are also required to file form 8938 to report them.
If the value of the inherited estate is over $100,000, expats will have to file form 3520 when they file their annual federal return for that year to report it (form 3520 is required for any Americans who receive a total of over $100,000 in foreign gifts during a year, so if an inheritance combined with other foreign gifts exceeds this value threshold, the requirement will be triggered too).
It should be noted that FBAR and form 3520 filing do not carry any additional US tax implications, they are simply reporting requirements.
Expats who subsequently receive income from the estate that they’ve inherited, whether as rent, interest, dividends, or any other form of income, will also have to report it on form 1040.
Expats who are behind with their US tax filing because they weren’t aware of the requirement to file can catch up without facing penalties using an IRS amnesty program called the Streamlined Procedure.
The Streamlined Procedure requires expats to file their last three federal tax returns, their last six FBARS (if required), and to self-certify that their previous failure to file wasn’t willful avoidance.