Foreign Inheritance & U.S. Tax Laws: Do You Have to Pay?

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A foreign inheritance is not subject to U.S. estate tax unless the person leaving the inheritance is a citizen or resident of the United States or the inheritance includes property located in or issued in the United States (known as U.S. situs property). California has no estate taxes, so California residents don’t have to worry about estate tax on any inheritance at the state level, regardless of whether it includes foreign assets.

However, any resident or citizen of the U.S. must report foreign accounts and property on their U.S. tax return in order to avoid penalties and potential criminal charges.

At my Saratoga lawyer’s office, we frequently receive queries regarding money and property inherited from family members in other countries. Two of the biggest questions we get are:

• Do estate taxes have to be paid on my foreign inheritance?

• If I transfer inherited money from a foreign account to a U.S. account, will I have to pay taxes on the money I receive?

Foreign inheritances are subject to estate taxes under the following conditions:

• The donor (the deceased person whose property you are inheriting) is a citizen or resident of the United States — in which case their entire world-wide estate is subject to U.S. estate taxes.

• The estate includes U.S. situs property (property located in the United States or issued in the United States in the case of stocks and similar assets) — in which case only the U.S. situs property is subject to estate taxes.

When the inherited money is transferred to a U.S. account, as long as it is reported properly, this money is not subject to estate tax unless one of the two conditions above apply.

In any case, it is best to have an estate lawyer and accountant review your foreign inheritance to ensure that any taxes that may be due are paid. It is not a good idea to try to determine this yourself because tax laws are complex and changing. At my Saratoga lawyer’s office, we can help you determine whether your inheritance is subject to estate taxes.

While a foreign inheritance may not be subject to taxes, income generated from money in foreign accounts probably will be. Citizens and residents of the United States are required to report all foreign accounts to the Internal Revenue Service (IRS) on their tax return — even if the accounts don’t produce any income!

Why am I bringing this up and making a big deal out of it? Because in recent years, the IRS has been cracking down on people with unreported foreign accounts. Putting money in foreign accounts and not reporting it has been one way to avoid paying taxes on it. Many people did this without realizing it was illegal; others did it hoping they wouldn’t be caught. Now, however, the government is chasing down those folks and forcing them to pay not only the taxes they owe, but also hefty penalties. In some cases, foreign account holders are being charged criminally for tax evasion, filing a false tax return and similar charges. These charges can lead to fines and sometimes imprisonment.

Receiving a foreign bank account as part of a foreign inheritance requires you to report that account to the IRS on your tax return. However, for someone unfamiliar with tax laws regarding foreign accounts, it would be easy to think they don’t have to report it. Such a situation could lead to someone unknowingly breaking the law. Each year you must report any foreign accounts you held during the previous year. So even if you only held the foreign account for a short time before transferring the funds to a U.S. account, you must still report it.

Remember, there are no California estate taxes, but some other states and the federal government do. To find out whether your foreign inheritance is subject to estate taxes or needs to be reported to the IRS, come down to my Saratoga lawyer’s office and receive a free initial consultation: (408) 741-3500.

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