Tax liability on an inheritance from abroad

[davew9128]

You don't notify the IRS until it is time to file your 2019 return. You will need to file a 3520 to report your share of the estate to the IRS. Regardless of how the Canadian tax system handles it, US law applies to your beneficial interest in the estate. Hopefully you'll get competent Canadian representation for the CRA reporting, and competent US representation for the IRS reporting as there are substantial differences between Canadian and US law.

 

[LdiJ]

You don't notify the IRS until it is time to file your 2019 return. You will need to file a 3520 to report your share of the estate to the IRS. Regardless of how the Canadian tax system handles it, US law applies to your beneficial interest in the estate. Hopefully you'll get competent Canadian representation for the CRA reporting, and competent US representation for the IRS reporting as there are substantial differences between Canadian and US law.

Do we know that the two distributions will be high enough to require a 3520? Its possible that they will be, but its also possible that they won't. "Substantial" doesn't necessarily mean the same thing to all people. There really should be no US tax on this inheritance. Only the need to report it, if its above the level required for the 3520. As long as he avoids the money going into a Canadian bank account in his name (if it comes straight from the estate bank account and is wire transferred it wouldn't be a problem), the US side of things should be pretty simple.

 

[LdiJ]

You don't notify the IRS until it is time to file your 2019 return. You will need to file a 3520 to report your share of the estate to the IRS. Regardless of how the Canadian tax system handles it, US law applies to your beneficial interest in the estate. Hopefully you'll get competent Canadian representation for the CRA reporting, and competent US representation for the IRS reporting as there are substantial differences between Canadian and US law.

On the US side of things it should be pretty simple. As you said, he will have to file a 3520 IF his substantial distribution is on or above the level requiring that. There will be no federal US taxes (some states still have an inheritance tax). So, its going to be pretty simple.

On the Canadian side, I just read that beneficiaries of estates do not pay any taxes. All taxes are paid by the estate itself before the money is distributed to beneficiaries.

 

[Taxing Matters]

My question is do I have to send the IRS any information prior to declaring this on my 2019 taxes, and how do I deal with the second installment of the same estate payout for my 2020 taxes?

That vastly simplifies things because now you are inheriting cash, not the house. What you receive by inheritance is not taxable income for federal or New Mexico income tax. And since you aren't getting a house as your inheritance, you don't have to worry about figuring your basis to determine gain on the later sale of the house. You won't have to report the cash inheritance on your income tax returns at all.

But since this inheritance is coming from a foreign estate, you may have another filing obligation that most people would not be aware of. If you receive more than $100,000 from the estate during the tax year you must file a Form 3520 with the IRS. This is not a form you file with your federal income tax return. The due date for filing this separate return is the same as for filing your federal income tax return, however. There is no tax to pay with this form; it is an information return only. However, the statute of limitation for the IRS to assess tax on your income tax return may be tolled until the form is filed. In addition, in some instances there are significant penalties that the IRS may impose if you fail to file the return. In those circumstances, the minimum penalty is $10,000. So you do not want to overlook filing this form.

 

[davew9128]

Do we know that the two distributions will be high enough to require a 3520? Its possible that they will be, but its also possible that they won't. "Substantial" doesn't necessarily mean the same thing to all people. There really should be no US tax on this inheritance. Only the need to report it, if its above the level required for the 3520. As long as he avoids the money going into a Canadian bank account in his name (if it comes straight from the estate bank account and is wire transferred it wouldn't be a problem), the US side of things should be pretty simple.

Its not strictly about the distributions, its about being a beneficiary of a foreign estate/trust.

 

[NeilTheCop]

That vastly simplifies things because now you are inheriting cash, not the house. What you receive by inheritance is not taxable income for federal or New Mexico income tax. And since you aren't getting a house as your inheritance, you don't have to worry about figuring your basis to determine gain on the later sale of the house. You won't have to report the cash inheritance on your income tax returns at all.

But since this inheritance is coming from a foreign estate, you may have another filing obligation that most people would not be aware of. If you receive more than $100,000 from the estate during the tax year you must file a Form 3520 with the IRS. This is not a form you file with your federal income tax return. The due date for filing this separate return is the same as for filing your federal income tax return, however. There is no tax to pay with this form; it is an information return only. However, the statute of limitation for the IRS to assess tax on your income tax return may be tolled until the form is filed. In addition, in some instances there are significant penalties that the IRS may impose if you fail to file the return. In those circumstances, the minimum penalty is $10,000. So you do not want to overlook filing this form.

The check will be well below $100K in Canadian or US dollars.

 

[LdiJ]

Its not strictly about the distributions, its about being a beneficiary of a foreign estate/trust.

You only have to file that form if the gift is above a certain level. I just looked it up, and its $100,000 or more in a single calendar year.

 

[davew9128]

You only have to file that form if the gift is above a certain level. I just looked it up, and its $100,000 or more in a single calendar year.

You have to file the form if you are the beneficiary of a foreign trust or estate REGARDLESS of the amount of distributions.

 

[Taxing Matters]

You have to file the form if you are the beneficiary of a foreign trust or estate REGARDLESS of the amount of distributions.

Not correct. You are right as to being a beneficiary of a foreign trust, as that is governed by IRC § 6048 and the reporting requirements there are much more involved, since you must report your creation of, interest in, transfers to, or distributions from a foreign trust regardless of amount.

But the rule for gifts received from a foreign person other than a trust is governed by IRC § 6039F, which does set a minimum amount for the gift to be reported to the IRS. The amount was originally $10,000, but the Code indexes that for inflation, which for 2019 is $16,388. Moreover, the IRS has increased the threshold for the filing of these reports to $100,000 when the gift is from a foreign individual or estate. See the Form 3520 instructions.

So while the reporting for trusts under §6048 and the reporting for gifts received from other than trusts under § 6039F are both reported on Form 3520, the reporting requirements are very different between the two. The instructions for Form 3520 lays all that out.

 

[davew9128]

Not correct. You are right as to being a beneficiary of a foreign trust, as that is governed by IRC § 6048 and the reporting requirements there are much more involved, since you must report your creation of, interest in, transfers to, or distributions from a foreign trust regardless of amount.

But the rule for gifts received from a foreign person other than a trust is governed by IRC § 6039F, which does set a minimum amount for the gift to be reported to the IRS. The amount was originally $10,000, but the Code indexes that for inflation, which for 2019 is $16,388. Moreover, the IRS has increased the threshold for the filing of these reports to $100,000 when the gift is from a foreign individual or estate. See the Form 3520 instructions.

So while the reporting for trusts under §6048 and the reporting for gifts received from other than trusts under § 6039F are both reported on Form 3520, the reporting requirements are very different between the two. The instructions for Form 3520 lays all that out.

In other words yes I was correct. From the start.

 

[Taxing Matters]

In other words yes I was correct. From the start.

No, you weren't. You said:

You have to file the form if you are the beneficiary of a foreign trust or estate REGARDLESS of the amount of distributions.

(Bolding added). Those two words I put in bold are what make your statement wrong. You are thus saying Form 3520 must be filed if the OP is a beneficiary of a foreign estate regardless of the amount of distributions the OP got from the estate during the year.

You also said that:

Its not strictly about the distributions, its about being a beneficiary of a foreign estate/trust.

And again, the addition of the word "estate" makes that wrong.

This is because with a gift from a foreign estate it is all about the amount of the distributions you get from the foreign estate during the year. If you are the beneficiary of an estate then you only need file the form if you received more than $100,000 in distributions from the estate during the tax year. If you don't get any distributions from the foreign estate during the year, you need not file the Form 3520. If you only get, say, $50,000 from the estate during the year from the estate you need not file the Form 3520. The IRS explains this quite clearly in the Form 3520 instructions, on the very first page under "Who Must File", item 4a as follows:

4. You are a U.S. person who, during the current tax year, received either:​

a. More than $100,000 from a nonresident alien individual or a foreign estate (including foreign persons related to that nonresident alien individual or foreign estate) that you treated as gifts or bequests;.....​

You will see the same thing stated on the IRS page regarding gifts from a foreign person.

A major tax law treatise also states the same thing:

​

For purposes of determining whether the receipt of a gift from a foreign person is reportable, there are different reporting thresholds for gifts received from nonresident alien individuals, foreign estates, foreign partnerships, and foreign corporations. Accordingly, Form 3520 applies the following reporting thresholds and requirements:​

​

(1) Gifts from foreign individuals and foreign estates. A U.S. person is required to report the receipt of gifts from a nonresident alien or foreign estate only if the aggregate amount of gifts from that nonresident alien or foreign estate exceeds $100,000 during the tax year. Once the $100,000 threshold has been met, Form 3520 requires the donee to separately identify each gift in excess of $5,000, but does not require the identification of the donor.​

§ 48:160.Large gifts received from foreign persons, 13 Mertens Law of Fed. Income Tax'n § 48:160.

You are correct as to foreign TRUSTS. But you are wrong with respect to foreign ESTATES. With foreign estates, it very much matters how much in distributions the taxpayer received from the estate during the year, contrary your statement that the distributions do not matter.

I am well familiar with this. I was an attorney for IRS Chief Counsel in the International Division for a number of years.

If you still maintain that the Form 3250 must be filed by a beneficiary of a foreign estate regardless of the amount of distributions received, please cite for me the source — statute, regulation, or IRS guidance/instructions — on which you rely and how you square that with the Form 3250 instructions. If you can't do that, then perhaps just concede that you got it wrong as to the foreign estates. The reporting requirements for foreign estates and foreign trusts are quite different.

 

[davew9128]

After reviewing Taxing Matter's research I agree he is correct and I was not where a beneficial interest in an estate does not in itself create a Form 3520 filing requirement.