Accounting for Foreign Assets in Estate Planning

In today’s rapidly globalizing economy, diplomats, government officials, travel representatives, and employees of major international companies are not the only ones who have access to overseas travel and communication. Standard, everyday people such as immigrants or simply people with family abroad may all have assets overseas. However, these assets may be subject to domestic and/or foreign taxes. The IRS provides in-depth details about this process, but in this article, we will try to cover the general facts surrounding estate tax, gift tax, and income tax relating to foreign assets and estate planning.

Foreign Assets in Estate Planning

What Types of Assets Are There?

Firstly, we should clarify what exactly assets are. Assets, regardless of whether they are foreign or domestic, may be tangible, intangible, personal, or corporate. Tangible assets include land, equipment, infrastructure, and any money in the form of bonds, stocks, funds, savings accounts, certificates of deposit and other assets. Intangible property refers mainly to intellectual property, such as licenses, patents, permits, copyrights, brand names, blueprints, trademarks, and others. Personal assets may include both tangible and intangible assets that relate to a person’s characteristics, such as cars, insurance, artwork, jewelry, or retirement accounts. Corporate assets are any assets which are owned by a company and can be attributed to its brand name.

Are Foreign Assets Subject to Taxation?

Just as with assets located in the United States, foreign assets may be included in wills and trusts, and be gifted to a beneficiary during life or upon death. You may acquire assets from your family members, relatives, or friends overseas. A gift of personal property under the terms of a last will and testament is known as a bequest. Bequests may be subject to some form of domestic or foreign tax.

The federal estate tax applies to estates of U.S. citizens and legal residents, regardless of where they actually reside. If you inherit property from a U.S. citizen whose assets are located offshore, the property is subject to this tax. If you inherit money or property located in the United States, it may also be subject to the federal estate tax, even if it is owned by a foreign company or trust. Any foreign assets you inherit from a non-resident alien are not subject to the estate tax. Likewise, the United States does not impose inheritance taxes on bequests, nor does it impose income taxes on inheritances brought into the United States. However, some foreign countries may still levy inheritance taxes on your assets. This may ultimately lead to double taxation, highlighting why it is important to always consider foreign policies.

The U.S. gift tax rules apply to transfers by U.S. citizens and resident aliens regardless of where the transferred asset is located. In 2018, the annual gift tax exclusion for U.S. citizens is $15,000, and this amount changes over time with inflation. This means that any gifts you receive are not subject to a gift tax if they are worth $15,000 or less. If this is the case, you are also not required to file a gift tax return. Gifts to U.S. citizen spouses are exempt from gift tax. In 2018, gifts of up to $152,000 per year can be given, free of tax, to a spouse who is not a U.S. citizen. There is also a lifetime gift tax exemption, which also rises over time with inflation. The exemption for 2018 is $5.6 million. Gifts by non-resident aliens are subject to U.S. gift tax rules only if the transferred asset is situated in the United States, commonly called “U.S. situs” property. In general, tangible assets located in the United States are U.S. situs property but intangibles are not.

In addition to estate and gift taxes, U.S. persons (U.S. citizens, U.S. lawful permanent residents, and resident aliens) are required to pay U.S. income taxes on worldwide income. Therefore, any income-generating property located abroad and owned by a U.S. person is subject to U.S. income tax. Income from such property may also be subject to foreign income taxes in addition to U.S. taxes.

Keep Your Assets In Check – Consult With a Qualified Estate Attorney

As with all assets and sources of income, foreign assets and incomes must be wholly and truthfully reported to the IRS on their respective forms. There are serious repercussions for unreported income, undisclosed foreign financial accounts, and other forms of tax evasion. The consequences can include additional taxes, substantial penalties, interest, fines, and even imprisonment. If you or a loved one are planning to have foreign assets in your estate plan, we highly recommend that you consult with a licensed estate attorney who will guide you through the rough waters of making sure your estate plan is properly set up.