Tag Archives: foreign inheritance

Foreign Inheritance and Gift Tax Planning and Strategies

The IRS headline Aliens with any U.S. Assets Must File Estate Tax Returnsis shocking to their adult children.

And, it gets worse for those decedents owning foundations, foreign trusts, foreign companies, Stiftung, and Anstalts.   The heirs could owe the IRS both estate taxes and income taxes on their inheritance.

The label of the entity (such as trust) does not decide the entities IRS tax classification.     An entity labeled a “trust” can be classified for tax law a corporation.  Similarly, a foreign corporation can be categorized by the IRS as a trust.

Suzan’s father is a French citizen.  When he passed away, he was residing in Spain.  To avoid French and Spain taxes, he formed a Panama foundation.  In our telephone calls, Suzan labeled the foundation as a Panama trust.

As you expect, U.S. taxation of a foreign trust is very different from a foreign corporation.  Two factors differentiate corporations from trusts.  They are:
(1) the presence of associates; and
(2) the objective to carry on business and divide the gains.

One court case held that term “associates” does not mean plural.  The court held that a trust with a single beneficiary has associates.   Because of this case, the IRS seems to be focusing on the objective to carry on business.   An IRS legal opinion, on this link, highlights this.

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IRS Wipes Out “Penny Wise and Dollar Foolish” Self-prepared Form 3520 Reporting Foreign Gifts and Inheritance

form 3520, how to prepare from 3520, foreign gift, foreign inheritance, U.K. inheritance,

“Penny wise and dollar foolish” was one of my mother’s favorite saying. Doing the IRS Form 3520 yourself is foolish.

Another day and an another email from a poor soul preparing Form 3520.  This form is multipurpose.  One purpose is to track assets transferred to U.S. taxpayers.   The goal of the Form 3520 is to place a bullseye on you.

Most people hate reading instructions.  So, they just follow the form and ignore the instructions and the complex requirement found only in IRS regulations.    And there are even more deadly problems that make you an IRS target.

I will discuss those problems below;  however, first, please hire a certified public accountant or an international tax attorney to prepare the Form.  Next, retrieve all of the information from the deceased’s estate.  An IRS audit occurs a few years after you file the Form and by then the information may be misplaced.

  1.   The IRS is hunting for hidden offshore taxable income with the Form 3520.

    Besides looking for gift taxes and estate taxes, the IRS is looking for the tax evader.   The IRS examines the recipient looking for disguise income.   Tax evaders often claim the money they receive is a gift from a “friend” or distant relative or a foreign corporation.

  2. The IRS is hunting for gift taxes and generation skipping taxes for gifts by non-resident (domiciled) aliens from a U.S. bank account.

    The alien does not have the $5.5 million dollar gift and estate tax exemption.   In fact, they have almost no exemption, at all.   Gifts of money can be taxable. Gifts of money to a grandchild can be taxable twice (the gift tax and the generation skipping tax).   If you report a gift made by a transfer from a U.S. bank account, expect an examination and expect to owed taxes.

  3. The IRS is hunting for estate taxes for assets owned by a foreign corporation by the non-resident alien.

    Once again, so many emails and phone calls from U.S. taxpayers inheriting a foreign corporation  (this week it seem to be Panama companies).   Assets owned by a foreign entity are owned by the shareholder (learn more on this link).

    You (and the foreign estate) do have tax planning options but you need an international tax professional to select the correct strategy.

    The non-resident alien’s U.S. estate tax exemption is less than $60,000 (unless an estate tax treaty applies).   If the foreign corporation owns shares of U.S. companies (including those on the stock market) or U.S. real estate, then taxes are due.

    You personally owed the estate taxes or gift taxes since you received the property.  This is known as “transferee liability”.  Besides owning the taxes, you will owe a tax penalty and also interest.   You should expect about fifty percent of the amount you received to be paid to the IRS.    Of course, you will need a professional to represent you.

    The typical fee for a Form 3520 preparation is about $5,000 unless your relative owned a foreign foundation.   If so, then you have the complex issue for a non-grantor foreign trust (learn more on this link).