Reporting Foreign Inheritances and Bequests - A Refresher!
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We used to think that inheritances/ gifts were something that were only for the super wealthy. Then the book "The Millionaire Next Door" came out & our ideas around who is wealthy and what that meant changed.
Now we see an increasing number of grandparents gifting their money to help out the grandkids. We are mostly familiar with gifting and inheriting money in the U.S. context. The U.S. annual exclusions for gifting are lower ($18,000/ year/donee in 2024), but the lifetime exclusions are so high at this time, that many in their lifetime will never pay gift or estate taxes.
Note: Unless these exclusions are lowered by Law, at the time of publication in 2024, lifetime estate & gift tax exclusions are at USD 13.61 million in cash & property.
In the U.S. context, gifts exceeding annual exclusions are reported by the giftor on Form 709.
What does this look like for you if you have parents/ grandparents/ family abroad and you live in the U.S? Or you are an American Citizen/ Green Card holder who lives abroad? Do you know you might have an inheritance coming your way down the road? What do you need to know about how that gets reported on your US tax return? Will your inheritance get taxed in the U.S.?
I had written about this topic back in 2013. Since we have had so many questions recently, it felt like a great time for a refresher.
Let's dive in and answer your questions!
Receiving Gifts/ Inheritance from Non-US Persons/ Foreign Estates: If you did or know that you are going to receive an inheritance from a non-resident individual or foreign estate equal to or more than USD 100,000, this inheritance is not taxable but you do have a reporting obligation.
Reporting Gifts/ Inheritance from Foreign Corporations/ Partnerships: The thresholds for reporting such gifts/ inheritances are lower at $18,567 (2023).
Form Used: In either of the two cases mentioned, you will look at the aggregate amounts received during the calendar year and if they add up to more than USD 100,000 or 18,567, you will report them on Form 3520.
The Form 3520 is a paper form. It is completed and mailed to the IRS at the same time as your tax return is due (extended due date is applicable if the return was extended.)
What constitutes these gifts/ inheritances?: Gifts/ inheritances can be cash/ jewelry/ art/ investments in real property or financial instruments or other entities. Amounts paid directly to an institution for tuition/ medical expenses are NOT considered gifts.
Mode of transfer: If the gift is in cash/ financial instruments, the preferable method is to make the transfer to the giftee's foreign bank account and then repatriate funds to the United States as per the other country's money transfer guidelines.
Covered Expatriates: The HEART Act of 2008 introduced §877A and §2801 which had additional rules for gifts received from "Covered Expatriates". The receiver of a gift/ inheritance from a Covered Expatriate is responsible for 40% gift/ inheritance tax on such a receipt. There are some exceptions from this gift tax.
If any of these situations apply to you, as always, I recommend you work with an Enrolled Agent/ tax attorney/ CPA who has experience in the cross-border space.
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