International Inheritance and Gift Taxes

When a Nonresident decedent transfers an asset to a U.S. resident, there is no U.S. estate tax imposed. Nor does the United States impose an inheritance tax on a U.S. resident who receives such a bequest. However, depending on the gift/bequest, there may be other reporting and/or tax rules that are applicable. Such as in the case of a transfer of U.S. property.

A gift from a foreign national will only be subject to U.S. gift tax if the gift itself is located in the U.S. (U.S. situs property). The United States does have treaties with multiple countries when it comes to estates and gifts. Such treaties can sometimes nullify or minimize the taxes that would be imposed on such gifts and/or bequests. (It is best to speak with a tax professional to find out if a treaty exists in your particular circumstances.)

There are special rules when it comes to gifts or bequests from expatriates. IRC § 877 tells us that a “covered expatriate” is an expatriate who’s annual net income tax for the 5 years ending before the date of expatriation is more than a specified amount; who’s net worth is $2 million or more on the date of expatriation; or, who failed to certify that they have complied with all U.S. federal tax obligations for the 5 years preceding the date of expatriation. If you receive a gift or a bequest from a covered expatriate, IRC § 2801 imposes a transfer tax to you the recipient of the gift or bequest. The IRS is nice enough to deduct any gift or estate tax that may have already been taxed on the gift by a foreign government. (Internal Revenue Code § 2801(d))

If you are a U.S. resident and you are leaving an inheritance to nonresident family or friends, the U.S. estate tax rules remain the same regardless of your heirs domicile. However, the country of domicile of the person receiving the gift or bequest may have their own inheritance tax. For instance Japan, South Korea, France, and the U.K. are a few countries that do incorporate an inheritance tax. Meaning, the recipient of an inheritance who is domiciled in one of these countries is liable to pay a tax on the inheritance gift they receive. (There are also currently 5 states that have inheritance taxes.) So while the federal estate tax is now only imposed if your estate is valued at over $11,180,000, there may be consequences to those who receive bequests from you if they live in a state or country that applies an inheritance tax.