What Happens If You Inherit Money From Another Country?

Inheriting money from another country introduces a unique set of financial and administrative steps. The process involves navigating foreign tax laws, complying with United States reporting mandates, and managing the logistics of transferring the assets. For a U.S. beneficiary, this journey requires careful attention to the requirements of at least two governments. The initial phase involves addressing tax obligations in the country where the assets are located. Following that, the focus shifts to mandatory disclosures to the U.S. government, even if no tax is due on the inheritance itself. Finally, practical considerations like currency exchange come into play.

Foreign Country Tax Considerations

When you inherit assets from another country, the first financial hurdle you may encounter is the inheritance or estate tax of that foreign nation. Many countries levy a tax on the transfer of wealth from an estate. The structure of these taxes varies significantly; in some, the estate itself is responsible for paying the tax before any assets are distributed. In others, the tax liability falls directly on the beneficiary, with the amount owed often depending on the value of the inheritance and the relationship to the decedent.

Tax rates and exemption amounts in foreign countries can differ substantially, with local laws dictating who pays the tax, how much is owed, and the payment deadline. A potential avenue for relief comes in the form of international tax treaties. The United States maintains estate and gift tax treaties with countries including Australia, France, Germany, Japan, and the United Kingdom. These agreements are designed to prevent double taxation and provide clarity. Depending on the specific treaty, a U.S. resident might be eligible for a reduced tax rate, a complete exemption, or credits for taxes paid.

Navigating these foreign tax obligations often requires professional assistance within that country. An executor of the estate or a local advisor is typically responsible for calculating and paying any taxes due, and you may need to work with them to ensure all laws are satisfied before funds can be transferred.

US Federal Tax Implications

Upon receiving an inheritance from a foreign country, a primary concern for a U.S. beneficiary is its treatment by the Internal Revenue Service (IRS). The principal amount of an inheritance or a gift from a foreign person is not considered taxable income for U.S. federal purposes. This means that if you inherit $200,000 in cash, that initial sum is not subject to U.S. income tax.

This tax-free receipt of the principal does not mean the assets are free from U.S. tax obligations indefinitely. The distinction is between the inherited principal and any subsequent earnings it generates. Once the inherited assets are under your control, any income they produce is subject to U.S. taxation, as the U.S. taxes its citizens and residents on their worldwide income.

For example, if you inherit a foreign stock portfolio valued at $500,000, the $500,000 itself is not taxed upon receipt. If those stocks then pay $15,000 in dividends, that $15,000 is taxable income. Similarly, if you inherit cash and place it in a foreign savings account that earns $2,000 in interest, that interest is taxable. The same principle applies to capital gains. If you inherit real estate abroad and later sell it for a profit, the gain is subject to U.S. capital gains tax, with the cost basis being the property’s fair market value at the time of the original owner’s death.

Required Information for US Reporting

While the inheritance itself is not taxed, the U.S. government mandates reporting of significant foreign bequests to monitor assets entering the financial system. The primary form for this is IRS Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts. You must file this form if you receive more than $100,000 from a nonresident alien individual or a foreign estate during the tax year.

To complete Form 3520, you will need the full name and address of the decedent, a description of the property received, and the fair market value of the assets on the date of receipt. This is an informational return, but it carries substantial penalties for failure to file, which can be 5% of the inheritance value per month, capped at 25%.

If the inheritance includes funds in a foreign financial account, another requirement may be triggered. You must file FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR), if the aggregate value of all your foreign financial accounts exceeds $10,000 at any point during the year. For the FBAR, you need the name of the foreign financial institution, the account number, and the maximum account value during the year in U.S. dollars.

A third reporting obligation may arise under the Foreign Account Tax Compliance Act (FATCA), requiring Form 8938, Statement of Specified Foreign Financial Assets. This form is filed with your annual income tax return if your foreign assets exceed certain thresholds, which start at $50,000. The information needed is similar to the FBAR, including account details and values. All current forms are available on the IRS website.

Filing and Post-Filing Procedures

Once you have gathered the necessary information, the submission process for each form is distinct. Each has its own deadline and method of delivery.

IRS Form 3520 has a unique filing requirement. It is not filed with your annual Form 1040 income tax return but must be mailed separately to a specific IRS service center. The due date for Form 3520 is the same as your federal income tax return, including extensions. Because it is a paper-filed form, it is advisable to send it via certified mail to have a record of its timely submission.

In contrast, FinCEN Form 114, the FBAR, is filed electronically through the BSA E-Filing System, managed by the Financial Crimes Enforcement Network (FinCEN). The deadline for the FBAR is April 15, but there is an automatic extension to October 15. After submitting, you will receive an email confirmation with a BSA Identifier, which serves as your proof of filing.

Form 8938, Statement of Specified Foreign Financial Assets, is filed directly with your annual income tax return. It is attached as a schedule to your Form 1040. Its due date is therefore tied directly to your income tax filing deadline, including any extensions. After filing, retain copies of all submitted forms and related documentation as proof of compliance.

Managing and Transferring Inherited Funds

Beyond tax and reporting, inheriting money from another country involves practical steps to access and move the funds. The process begins with the foreign financial institution where the assets are held. You will likely need to provide documentation to prove your identity and legal right to the inheritance, such as a copy of the will, the decedent’s death certificate, and your government-issued identification.

Currency conversion is a significant factor, as the exchange rate determines the final amount you receive in U.S. dollars. Rates fluctuate daily and are set by the banks at the time of transfer. Banks also charge fees for this service, so it is wise to inquire about these costs. Some countries impose foreign exchange controls, restricting the amount of currency that can be moved out at one time, which may require you to transfer money in smaller increments.

The most common method for moving funds to a U.S. bank account is an international wire transfer. To initiate this, you must provide the foreign bank with your U.S. bank’s name, address, account number, and SWIFT code. Wire transfers are secure and fast, often completing within a few business days, but they come with fees from both the sending and receiving banks.