A Guide to Unraveling Foreign Inheritance with the Help of an Estate Planning and Tax Law Attorney

Jun 16, 2023 | Estates Planning and Asset Protection

On the path of life, there are people who, like you, are committed to working hard to leave behind a legacy for their family, their company, and their community. You have accomplished a great deal because of your financial knowledge and experience. 

But when it comes to inheritances from foreign countries, even the most educated and successful people may find themselves facing a confusing maze of tax rules and regulations.

This is where we come into play. 

As attorneys in estate planning and tax law, we at the law firm of Shann M. Chaudhry Esq., Attorney at Law PLLC, have a unique understanding of the difficulties that come with inheriting money from another country. We can guide you through the process of what happens when a U.S. citizen gets such an inheritance, providing you with the knowledge to make informed decisions and successfully traverse this complex terrain.

Comprehending the situation: the Internal Revenue Service Code

The Internal Revenue Service (IRS) has set certain procedures to guarantee that those who receive inheritances from abroad can adequately meet their tax responsibilities. 

One of the first and most important questions to ask is: is the inheritance subject to taxes on estates, gifts, or income? 

To calculate the amount of income tax that must be paid, you must first assess whether the inheritance contains taxable income. 

Examples of taxable income include:

  • Interest
  • Dividends
  • Rental income

Whether or not the deceased person was a U.S. citizen or resident affects the application of estate tax, whereas whether or not the recipient was either of those things affects the application of gift tax. 

Gifts and inheritances: Section 102 of the IRS Code

According to Section 102 of the IRS Code, gifts and inheritances are not considered taxable income for the recipient in most cases. 

As a U.S. citizen, you can breathe a sigh of relief knowing that the inheritance you receive from someone outside of the United States will not be subject to income tax. Because of this provision, you are free to concentrate on protecting and increasing the value of your inheritance without having to worry about any immediate tax responsibilities.

Keep in mind, though, that particular conditions may call for an exception to this general rule. 

For example, if the assets you received generate income, such as rental properties or investment accounts, you may be required to pay income tax on the revenues that were earned after the bequest. This is the case even if the inheritance was tax-free. 

Additionally, if you later sell any assets that you inherited, you may be subject to capital gains tax on such sales. 

Overseas inheritances can be complex, which is why it’s important to work with an estate and tax planning attorney. 

Reporting foreign inheritances: Section 6018 of the IRS Code

Even though most inheritances received from other countries are exempt from income tax, Section 6018 of the IRS Code requires you to declare any foreign gifts or inheritances that are valued at more than a certain amount. 

At this time, the threshold for reporting gifts received from foreign persons has been established at $100,000, but the barrier for reporting gifts received from foreign businesses or partnerships is $16,649. If you fail to comply with these reporting obligations, you could face penalties and additional unnecessary hassles.

When you work with a professional, you can fulfill your reporting requirements in an efficient, accurate manner. 

Estate tax: Sections 2101-2207 of the IRS Code

When someone from the U.S. gets an inheritance from another country, one of their first concerns usually involves estate tax. 

If the deceased person was a U.S. citizen or resident and if the inherited property is located in the United States, then the estate may be subject to estate tax. However, there are exceptions to this rule. For example, the estate tax often only applies to assets that are located within the United States when the deceased person was neither a U.S. citizen nor a resident.

According to Sections 2101-2207 of the IRS Code, the estate tax exemption for an individual in 2023 is $12.06 million. This means you may not be subject to estate tax if the entire worth of the inherited assets, coupled with the value of your existing assets, remains below this level. 

If, on the other hand, the value is greater than the exemption amount, it’s crucial to seek the assistance of an experienced attorney to successfully negotiate this intricate landscape. Drawing on our knowledge and experience, we can help you explore potential solutions to minimize estate tax obligations through tactics including forming trusts and putting gifting techniques into action.

Work with an estate planning attorney

The arrival of a foreign bequest in your possession is a momentous occasion. Even conscientious individuals with a great deal of knowledge and skill can benefit from the guidance of an experienced legal professional. 

As tax and estate planning attorneys, we at the law office of Shann M. Chaudhry, Esq., Attorney at Law, PLLC have a responsibility to equip you with the knowledge and resources you need to navigate the complex web of rules and regulations governing taxes. 

We see every customer as one of a kind and we are dedicated to customizing our approach to meet your particular requirements. Together, we will decipher the complexity of overseas inheritances so that you can maintain and expand your legacy while simultaneously protecting the things that are most important to you. Our entire staff is dedicated to your success and is here to safeguard your interests with flexibility, compassion, honesty, and respect. 

Contact our Texas law firm as soon as possible so that we can begin this adventure together. We want to make sure to protect your inheritance as a shining example of your commitment and contribution to the world.

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