If you are a U.S. citizen and you just learned of an inheritance from a non-U.S. citizen or you expect one in the future, you probably have questions about what will happen when you receive it. In general, the United States does not tax its citizens on inheritances of non-U.S. property from people in foreign countries. The federal government has no inheritance tax at all, though some states do (not including California). Nor will the government tax the estate of the person who gives you the inheritance. There are however, some significant exceptions that might lead to tax liability.
If the person who gave you the inheritance owned property in the United States, such as real estate, then his or her estate will owe taxes in the United States. The below information describes the situation for a non-citizen who does not live in the U.S.; the situation is different if the giver is considered to be domiciled here or is a permanent resident. Ownership of the real estate by a non-citizen, non-resident creates a “situs” in the United States for the non-U.S. citizen. His or her estate will have to pay U.S. taxes on the real estate or other property if its value exceeds $60,000.
The types of property that are taxed include real property physically located in the United States, tangible personal property such as jewelry or art kept in the U.S., ownership in U.S. corporations, mutual funds, and brokerage accounts. The types of property that are not taxed include money in U.S. bank accounts, insurance proceeds, and securities that generate portfolio interest.
If the person who gave you the inheritance is still living and gives you property that has a U.S. situs, then he or she may have gift tax liability. Gift tax liability in the United States arises when someone makes a gift of more than $15,000, which is the 2018 annual exclusion amount. Further, lifetime gifts affect the estate taxes assessed against the person’s estate.
If you received a gift from a U.S. citizen or a long-term resident who relinquished his or her U.S. citizenship or ceased to be a U.S. permanent resident (green card holder) on or after June 17, 2008, then you (not the giver) may owe the IRS taxes. There is a special law applying to gifts from some of these “covered expatriates”. (IRC § 2801.)
Finally, if you inherit money from a non-citizen abroad, you may need to notify the IRS by filing an informational tax return document. You should speak to your lawyer and accountant about which documents to file so that you comply with U.S. tax laws.
Planning your estate? Look to Janet Brewer, Esq. for thorough and thoughtful estate planning advice. Janet’s more than 20 years of legal experience will give you confidence and peace of mind. To schedule a “Get Acquainted” meeting, visit Janet's website or call her office at (650) 469-8206.