3 Tips for Navigating the Tax Impact of Inheriting Money as an Expat
It’s difficult enough to navigate the challenging tax and investment minefields that often occur when you’re an American citizen living overseas, yet receiving an inheritance as an expat can add a whole new level of complexity to your financial situation. Not only are you dealing with the emotions of losing a loved one but you must also navigate the challenges of cross-border estate and inheritance tax requirements as an expat living abroad.
Fortunately, a qualified wealth manager who has experience working with U.S. expats can guide you toward making smart decisions to help minimize your taxes and maximize your inheritance. The following tips can help you manage an inheritance from outside the U.S.
Tip #1 – Know the difference between inheritance tax and estate tax.
While the two may sound similar, there are important differences between estate and inheritance taxes that can significantly impact your financial situation as a U.S. expat.
Inheritance tax – An inheritance tax is one that is imposed on the heir who is inheriting assets. It’s triggered after the inheriting beneficiary is deemed rightfully entitled to receive an asset transfer from the estate. The taxable event is primarily linked to the right to receive a transfer incident to death, not necessarily to the receipt of the actual asset. In many countries, a beneficiary may opt to reject this right to receive the transfer, which eliminates the inheritance tax burden. Under an inheritance tax regime, heirs have the right to receive the asset bequeathed, subject to inheritance taxes. In other words, inheritance taxes become the inheriting person’s tax liability, not the estate’s tax liability.
Estate tax – In contrast to an inheritance tax (which is the responsibility of the inheriting beneficiary), an estate tax is imposed upon the deceased person’s estate. Under an estate tax regime, heirs receive inherited assets after any necessary estate taxes have been paid by the estate and its executor.
Tip #2 – Understand which inheritance and estate taxes your inheritance may trigger.
The United States has no federal inheritance tax, but it does impose a federal estate tax. A maximum 40% U.S. federal estate and gift tax applies once a U.S. citizen or permanent resident individual has used up his or her lifetime unified estate and gift tax credit amount, which is $12.06 million for individual filers in 2022 ($24.12 for married couples filing jointly). This tax is only applicable to assets that exceed the maximum threshold.
For many U.S. citizens, the current high exemption amount means their exposure to U.S. federal estate taxes is very low to nonexistent. Therefore, the primary tax risk exposure is typically in the individual’s country of residence.
While many countries impose some type of inheritance or estate taxes upon their citizens, they typically don’t apply their tax regime to inheritances received from abroad. However, depending on your country of residence, your family members may eventually face local taxation on your U.S. inheritance if you die as a resident in that country. For insight into whether inheritance and estate taxes apply to expats living in your country of residence, access our quick-reference table.
Tip #3 – Understand what you’re inheriting.
While most U.S. expats who inherit an estate won’t be subject to U.S. estate taxes due to current high threshold amounts before estate taxes kick in, there are some important U.S. reporting requirements to be aware of, making it essential to have a firm understanding of what, exactly, you’re inheriting. For example:
- Bank and brokerage accounts – If you inherit any foreign-based financial accounts with a single or combined balance of more than $10,000 in the year, you will need to report the assets to the U.S. Treasury Department in a Report of Foreign Bank and Financial Accounts (FBAR) FinCen Form 114 filing.
- Offshore assets – If you are a U.S. expat and hold offshore financial assets worth more than $200,000 at year-end or more than $300,000 at any point during the year, you may need to report the assets to the U.S. IRS using Form 8938.
- Foreign gifts – If you receive more than $100,000 in foreign gifts in any given year, you may need to report these assets using Form 3520.
Filing these forms doesn’t necessarily mean you’ll be liable for additional U.S. taxes; however, it’s important to be aware of these reporting requirements. As an American living overseas, make sure you’re aware of important considerations that can affect your U.S. tax bill.
If you’re a U.S. expat and need help navigating the challenges of a recent inheritance, Creative Planning International is here to help. We work with Americans abroad and cross-border families to help maximize their inheritance and avoid costly mistakes. We understand the complex interaction of multi-jurisdiction tax and regulatory regimes and take into account a wide range of country-specific factors as we help you minimize the taxes you owe. For more information, request a meeting with a member of our team.