Is there a Foreign Inheritance Tax in the United States?

Is there a Foreign Inheritance Tax in the United States? 

The Internal Revenue Service’s international inheritance and estate tax laws are very complicated. Like most things involving foreign income and overseas estates, the IRSS does not make it very easy for a US Person to determine whether or not they are subject to any US inheritance tax when they receive a foreign inheritance.  When it comes to foreign inheritance tax, there are usually two (2) key aspects to consider when receiving a foreign inheritance, including:

• • • Whether or not there is a tax; and –

    • What the reporting requirements are for US persons who receive a foreign inheritance.

In actuality, there are actually several moving parts to consider, such as:

• • • Is the foreign estate owned by A US Person?

    • Are any of the assets located in the United States?

    • Is it a US Person with Foreign Assets?

Let’s review the basics of the foreign inheritance tax in the United States.

Inheritance Tax in the United States

The first important fact to consider is that technically there is no inheritance tax in the United States at the federal level — some states do have an inheritance tax. Instead, The United States has an estate tax (and gift tax) on certain transfers. In other words, it is the estate that is taxed and not necessarily the beneficiary or heir per se, although it does impact how much is received by the estate beneficiaries/heirs.

Foreign Person or Foreign Estate  

One key distinction involving foreign inheritance tax, is whether or not the assets are foreign — or simply owned by a foreign person.

Here is a typical example:

• • • Parna is a foreign person who has only foreign assets as part of her foreign estate.

    • Kendra is a US person who is a beneficiary of the estate and who receives a $300,000 inheritance from the foreign estate.

Since the estate is foreign and the assets are foreign, there is (generally) no U.S. tax implication for Kendra. Although, since Kendra received a gift from a foreign person which exceeds more than $100,000 in the tax year (no distinction between gifts and inheritances for form 3520 purposes) — Kendra is required to file an IRS Form 3520.

Foreign Person with US Assets

When a foreign person has US assets in their overall estate, the US-based assets (such as real estate) may be subject to estate tax when it is transferred to the US beneficiary. Identifying what type of property is considered United States Property for inheritance purposes vs gift purposes requires a very detailed analysis beyond the scope of this introductory article — other than for you to simply note that if a foreign person has US assets, the US assets may be subject to estate (or gift) tax.

US Person with Foreign Assets

When the decedent is actually a US person who has foreign assets as part of their estate, the value of the foreign assets is included as part of the total estate. As a result, depending on the total value of the estate and the exemption/exclusion available at the time the person passes away — it will impact whether the estate is subject to an estate tax and whether Form 706 is required. Currently, there is a very high exemption for the estate tax, but that tends to change when the new guard comes into office.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure. 

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