The hidden costs of a foreign inheritance

The United States — the "Great Melting Pot" — is a defining example of a truly international country. Seen as the land of possibility, immigrants have come to America hoping to find their own resounding success. Thanks to hard work, innovation, and a splash of good luck, that's become a reality. Long story short, an incredible amount of US residents are either first or second-generation immigrants.


Unfortunately, the US tax code is so complicated when it comes to dealing with overseas accounts, especially inheritances. In part one of our three-part series on estate taxes, we touched on the overwhelming job that those left behind have when someone passes away. Add foreign funds to the mix and things can get to the point where the heirs throw their hands in the air and give up.


They stop trying to figure out what forms to fill out, what’s taxable, what’s not taxable, what should and shouldn’t be reported (and that's assuming that they’ve even heard of FATCA), and a litany of compliance forms like the FBAR, Form 5471, Form 3520, and Form 3520-A. Based on just reading that list, can you blame them? Most people aren’t trying to hide these funds, they just don’t know how to handle the inheritance and blindly hope that they didn’t make any mistakes. Or again, they are overwhelmed and don't even know where to begin.​​



They may even get a letter from a foreign bank saying that they have to report the inherited funds, but become paralyzed with fear (for good reason), and simply continue to hope that nothing "too bad" happens. I hate to say it, but when it comes to the IRS, "too bad" is too often a reality.


The most important things to know about foreign inheritances:


  • If you have a financial interest in — or signature authority over — any financial account in a foreign country, and at any time during the calendar year the value of these accounts is over $10,000, you must file an FBAR.​
  • If you leave the money in the foreign account but don’t touch it, you still have to report it!
  • If it’s a family foundation or trust, you have to report it!
  • If the account doesn’t generate any income or interest, or if you lost money on the account, you have to report it!
  • If there are multiple accounts that are each under the reporting threshold, but combined exceed the $10,000 mark, you have to report them!
  • If you hold power of attorney over your parents' foreign accounts, you have to report them!
  • The FBAR was previously due by June 30th of the year following the account holder meeting the $10,000 threshold; going forward, the new due date is April 15th.


The number one cause of paralysis: family ties


Let's talk about family ties. No matter how hard you try to avoid it, it always seems like the "lively debates" are inevitable. After all, when everyone gets together, isn’t it easy to decide if you should order Thai, Mexican, or Chinese food? Or, more likely, do you watch in horror as the conversation devolves into chaos with everyone pushing for something different. And then, when everyone is all riled up, your sister-in-law yells, “Jeez! Why don’t we just order pizza like we always end up doing?” We've all been there.


If these types of deliberations stir up such controversy, then it is fairly easy to imagine how much more difficult it can be when dealing with foreign inheritance money that may not have been properly reported to the IRS. Not only are you dealing with differing personalities, but tax law isn't exactly the best example of clarity. For instance, did you know that even if they’re co-mingled on one account, every sibling has to report the account? Some people assume “Oh, my brother is in charge and takes care of all that stuff," but if their name is on the account then they are also responsible for reporting it.


We’ve had clients who want to use an IRS offshore disclosure program so they don't need to worry about their foreign inheritances. So often, they ask the same question – they want to know if they are required to disclose information about their siblings' interests in the same foreign bank accounts, trusts, or corporations. They ask this question because, oftentimes, there are one or two siblings that may not choose to come clean. The answer is to plan on the IRS learning about everything anyway. If the siblings have co-ownership, then the IRS is going to find it out. At IRSMedic, we're of the mind that the best way to deal with that situation is a candid discussion to assess the actual risks that all the siblings will face. Bear in mind, other families are facing the same dilemma. And while it isn't an easy statement to make, we've come to see that it's frequently those who are the last to decide that wind up in the worst position.


Every situation can be made better


It is very difficult to get international compliance 100% right. The good news is that every messy situation can be made better, no matter how complicated it may seem. If you have been sitting on an unreported foreign account and hoping that the IRS will never find you, it’s time to come clean. The IRS prefers you disclose it, even if a good period of time has elapsed. You're always going to be in a better position with the IRS not under the belief that you're trying to trick them. By coming forward and showing you understand the gravity of the situation, you can establish some good will. And you never know when that good will might come to your aid. Contact us for help; you can schedule a free consultation to find out if you need to take action.


Watch as Anthony discusses the issues of dealing with family interactions and inherited money. You can also visit parentaladvisoryshow.com to watch all three episodes in our series about estate taxes.