What happens when a non-U.S. relative leaves you an inheritance in their will? Will special inheritance taxes be due on the bequest? Are there restrictions on bringing money into the U.S.? I have prepared a quick guide below to helping U.S. citizens and residents deal with the situation when they inherit money from a foreign relative.
Estate and Inheritance Taxes
The country of residence of the deceased may require payment of estate or inheritance taxes. This process should be taken care of by the executor of the estate and through the probate process in that country. As far as the U.S. is concerned, testamentary gifts (gifts resulting from someones death) do not trigger any tax obligation on behalf of the beneficiary. There is neither any estate/inheritance tax on such gifts nor is such a gift considered income for purposes of federal income tax. There is one exception to this rule regarding gifts and bequests over the annual exclusion amount (currently $13,000) from former U.S. citizens who have renounced their citizenship and live outside the U.S and former green card holders. These rules are complicated and affect only a very select group of individuals. Washington state likewise imposes no tax liability on the receiver of a testamentary gift.
Bringing the money into the U.S.
There are few restrictions on bringing money into the U.S. from a foreign country. Generally speaking, U.S. citizens are free to wire or otherwise bring money into the U.S. from foreign countries. There are numerous reporting requirements which I detail below that may apply depending on the situation and the amount of assets involved. While the U.S. imposes financial sanctions on a number of nations through the Office of Foreign Assets Control (“OFAC”), generally money from bequests is allowed to be brought into the U.S., however bringing in personal property from a country on the sanctions list may be more difficult. If an inheritance is coming from a country that has OFAC sanctions in place, it is a very good idea to discuss the matter with an attorney experienced in OFAC matters.
The following is a list of reporting requirements that may apply when a U.S. person receives an inheritance from a foreign person. The rules and regulations related to these matters is constantly changing, so anyone who has received an inheritance should look into the specific reporting requirements in some detail as the penalties for failing to properly report can be significant.
- IRS Form 3520 – U.S. persons who receive $100,000 or more in gifts and bequests from foreigners in a year must report those amounts on form 3520 by April 15th of the following year. Additionally, U.S. persons who receive distributions from foreign trusts must also report on this form. Gifts and bequests are not taxable, but distributions from trusts are generally taxed as income. If you receive a large inheritance ($100,000+) you will need to file this form with your taxes for the year. Note that an extension to file your income taxes does not apply to filing this form.
- FinCEN Form 104 Currency Transaction Report – Any currency transaction or series of transactions over $10,000 must be reported by the U.S. financial institution to the government. This reporting requirement is the responsibility of the financial institution that receives the foreign funds.
- Department of the Treasury Form 90-22.1 – All U.S. persons must report annually to the Department of the Treasury any foreign bank accounts holding at least $10,000 that they have a financial interest in (i.e. their name is on the account) or that they have signing authority over (i.e. they can directly communicate to the foreign bank instructions for moving money into or out of the account). If there is a probate account or account in the name of the deceased or their estate in a foreign country and the inheritance is paid directly from this account into a U.S. account, then this form is not necessary.
- FinCEN Form 105 – Any person who physically brings, sends or receives $10,000 or more into the U.S. (by plane, mail, etc.) must complete and file form 105. This form must be filed with the Commissioner of Customs or the Customs Officer when entering the U.S.
I have mentioned many of the most important considerations from a U.S. standpoint of receiving a foreign inheritance but due to the nature of a blog, I can not touch upon every legal or tax issue that might be involved. I encourage anyone who has further questions regarding these issues to discuss their matter with an attorney who can assist them. For a free consultation on this or any other estate tax or probate matter, please contact Ryan Velo-Simpson, Seattle Estate Planning Attorney or use the comment submission box to the left.
WARNING REGARDING SCAM EMAILS RELATED TO FOREIGN INHERITANCE
The “Nigerian Scam” is an extremely prevalent email scam which offers the prospect of riches for very minimal financial assistance. If you receive an email from someone in Nigeria or needing help getting money out of Nigeria, delete the message and do not respond. Another variant of this scam is an email that states a U.S. citizen, often times using the name of a distant or long-lost relative of yours, has died out of the country without any family and that you are a beneficiary or heir of their estate. The email promises a small fortune (millions of dollars) in inheritance and all you need to do is prove who you are and then pay some administrative fees by wire transfer. DO NOT REPLY TO THIS EMAIL OR PROVIDE ANY INFORMATION OR PAYMENTS. If you are unsure if you have received a suspicious scam email, please visit the U.S. Federal Trade Commission website: http://www.ftc.gov/bcp/edu/