What happens when I receive an inheritance as a US Person?

3 min

Understanding Inheritance for US Persons

Navigating the complexities of inheritance laws and tax obligations can be particularly daunting for US persons living abroad. Whether you’re an expatriate or have ties across borders, understanding the implications of receiving or leaving an inheritance as a US citizen or resident alien is crucial. This guide aims to demystify the process, offering clear insights into how different scenarios may affect your financial responsibilities to the IRS.

What happens when I receive an inheritance as a US Person?

As a US person, receiving an inheritance from either a US or non-US source can significantly impact your tax obligations. The United States taxes its citizens and resident aliens on their worldwide income, including inherited assets. However, the tax implications differ based on the nature of the inheritance, the value of the estate, and the country of origin.

US vs. Non-US inheritances

  • From a US Person 

Generally, the estate of the deceased is responsible for any estate taxes before distribution. Beneficiaries typically do not owe income tax on the inherited value. However, if the estate generates income (e.g., through investments), you may have tax obligations regarding that income.

  • From a Non-US Person

Inheritance from a non-US person introduces complexity, particularly with estates that are not subject to US estate taxes. You may need to report inherited foreign assets if they meet certain criteria. It’s essential to understand the tax treaty between the US and the country from which the inheritance originates, as it can significantly impact your tax liabilities.

What happens when I die and my non-US Children receive my inheritance?

Leaving assets to non-US persons (including your children) adds layers to estate planning. The key considerations include the nature of the assets and their location. US-situated assets might be subject to US estate taxes, whereas non-US assets are generally not. However, rules around gifting can sometimes offer tax-efficient strategies for transferring wealth without the heavy burden of estate taxes.

What happens when I die and my US Children receive my inheritance?

When US children inherit from a US person, the estate is first assessed for any owed US estate taxes before distribution. For substantial estates, this can result in a significant tax liability. However, assets passed to beneficiaries, including US children, are typically not subject to income tax upon transfer. Planning with trusts and other estate planning tools can mitigate the estate tax impact and secure a financial legacy for your heirs with minimal tax implications.

Required forms and thresholds

Understanding and complying with IRS requirements is critical in managing inheritance taxes effectively. 

The Form 3520, “Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts,” is particularly relevant for US persons receiving large gifts or inheritances from non-US sources.

  • Form 3520 Requirements

You must file Form 3520 if you receive more than $100,000 from a nonresident alien individual or a foreign estate that you treat as gifts or bequests. This form helps the IRS track substantial foreign transactions and ensures compliance with US tax laws. Filing Form 3520 in many cases does not mean that tax is actually due.

  • Estate Tax Thresholds:

For US persons, the estate tax applies only to the value of an estate exceeding certain thresholds, which are subject to change. As of my last update, the estate tax exemption was significantly high, affecting only the wealthiest estates. However, it’s crucial to Inquire with your local accountant about the tax implications in the country where you reside.

More information about receiving an inheritance as a US Person?

We, the founders of Americans Overseas, were born in the Netherlands and obtained our American nationality through our (American) mother.

When we heard about the US tax system for the first time around 2013, we were in total disbelief (it can’t be true!), anger (how can they do this?), fear (am I going to get fined or pick up other problems?), and panic (what should I do?). It is (unfortunately) true that there is an additional American tax levy. But there’s no information from the local government, and when approached, the consulate referred us to the IRS, and the IRS was impenetrable.

That’s why we started this initiative to help people from all over the world by providing proper information about the US tax system to avoid unnecessary panic and offering help free of obligation and free of charge. If needed, we have a network of affordable professionals (accountants) who can help you with yourUS tax inheritance.

 

Sources US tax inheritance: