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Tax Talk with George Saenz

Ask the tax adviser

Inheritance from a non-U.S. citizen

Dear Tax Talk:
What are the tax implications on receiving an inheritance from non-U.S. parents living in a foreign country? I'm an American citizen married to a Dane, living in New York. Her parents live in Denmark and want to limit the amount of taxes we have to pay on our inheritance.

Dear JK:
Since your in-laws are foreigners, there is no U.S. estate tax on the assets even though the assets are received by U.S. citizens. And generally, inherited property is free of income taxes. The only exception is when the property inherited would have represented an item of income to the decedent, such as an IRA or death benefit from an employer.

The fact that the property is income-tax free doesn't change when the inheritance is received from a foreigner. If the inheritance were received outright in the form of cash, bank deposits, real and personal property and marketable securities, then there would be little tax complications by reason of the items being foreign.

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However, if you're receiving property in trust or that was in trust, you may have some tax complications, and I would recommend consulting a tax adviser specializing in U.S. taxes as it pertains to foreign transactions.

If the inheritance exceeds $100,000, you need to file an information report with the Internal Revenue Service providing certain details of the inheritance. The information is reported on IRS Form 3520 and is attached to your individual tax return for the year that you receive the inheritance.

The form is only filed for informational purposes and does not affect your tax. In connection with completing the form, it would be a good idea to obtain copies of documents relating to administration as well as the value of the inheritance.

If you continue to maintain the property overseas, you'll need to pick up the income from it as you would with any other income producing investments. In addition, you may be required to disclose your foreign bank accounts to the U.S. Department of Treasury (not the IRS) on Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts. This form is to be filed separately with the Treasury Department by June 30.

-- Posted: Jan. 18, 2002

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See Also
Taxes on an inheritance
What to do with a windfall
Inheriting income in respect of the decedent
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