How Does Inheritance Tax Apply to Assets Received from Foreign Nationals?

When U.S. citizens or residents inherit assets from foreign nationals, the inheritance tax and estate tax rules can become complex. Foreign-sourced assets are treated differently under U.S. estate tax laws, and there may be additional reporting requirements, depending on the location and value of the assets. Understanding how inheritance tax applies in these situations is crucial for proper tax planning.

Inheritance Tax and Assets from Foreign Nationals:

U.S. Estate Tax vs. Inheritance Tax

It’s important to clarify that the U.S. imposes estate tax rather than inheritance tax. Inheritance tax, if applicable, is levied by certain states (not at the federal level), and only in cases where the beneficiary is the recipient of an inheritance from someone who lived in that state. The federal government does not impose an inheritance tax but does have estate taxes that can apply to the value of the estate of the decedent.

Foreign-Sourced Assets and U.S. Estate Tax

When U.S. citizens or residents inherit assets from foreign nationals, the tax treatment can vary based on whether the assets are U.S.-sited or foreign-sited.

U.S.-Sited Assets: U.S. estate tax applies to all U.S.-sited assets, regardless of the decedent’s nationality. This includes real estate, investments, and businesses located within the U.S. For example, if a foreign national owns property in the U.S. and leaves it to a U.S. resident, the U.S. estate tax would apply to the value of the property.

Foreign-Sited Assets: Generally, U.S. estate tax applies only to U.S.-sited assets. For assets located outside the U.S., U.S. estate tax typically does not apply. However, if the foreign national's estate is large enough, it may still be subject to estate tax in the country where the assets are located.

Estate Tax Exemption

For U.S. citizens and residents inheriting foreign-sourced assets, the federal estate tax exemption applies, which is $12.92 million in 2025. This means that if the total value of the decedent’s U.S.-sited and foreign-sited assets combined exceeds this exemption threshold, the estate could be subject to estate tax. The exemption applies to both domestic and foreign assets.

Tax Treaties and Foreign Estates

The U.S. has estate tax treaties with several countries, which may provide exemptions or reduced estate tax rates for U.S. citizens and residents inheriting foreign-sited assets. These treaties may allow the assets to be exempt from double taxation or offer credits to offset estate taxes paid to the foreign country. It’s essential to review the specific treaty provisions between the U.S. and the country where the decedent resided to understand how the tax treatment works.

Foreign Estate Tax

In addition to the U.S. estate tax, foreign nations may impose estate taxes on assets located within their borders. If a foreign national’s estate is subject to estate tax in their country, the beneficiary may need to file an estate tax return in that jurisdiction, and the tax liability will depend on the foreign country’s tax rules. In some cases, U.S. citizens or residents may be able to receive a foreign tax credit for estate taxes paid abroad to prevent double taxation.

Reporting Requirements

U.S. residents and citizens inheriting foreign-sourced assets may face specific reporting requirements. For example, the IRS requires U.S. citizens or residents to report any foreign assets valued over a certain threshold on Form 3520 (Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts). Failure to report foreign-sourced inheritances can result in significant penalties.

Special Considerations for Non-Citizen Foreign Nationals

The estate tax treatment of foreign nationals who are not U.S. citizens can be more complex. For example, non-citizen foreign nationals may not be eligible for the same estate tax exemption as U.S. citizens, which can result in higher estate tax liabilities. Additionally, special rules may apply if the decedent was a U.S. resident at the time of death, as their worldwide estate may be subject to U.S. estate tax, whereas a non-resident foreign national may only face U.S. estate tax on their U.S.-sited assets.

Example:

If a U.S. resident inherits $5 million in real estate from a foreign national living in the U.K., the value of the real estate in the U.K. would generally not be subject to U.S. estate tax. However, if the estate exceeds the U.S. estate tax exemption ($12.92 million for 2025), the estate could still be liable for estate tax on U.S.-sited assets. Furthermore, if the U.K. imposes estate taxes on the inherited real estate, the beneficiary may be able to claim a credit for the estate taxes paid in the U.K.

Conclusion:

When U.S. citizens or residents inherit assets from foreign nationals, the estate tax implications can be complex. U.S. estate tax typically applies to U.S.-sited assets, while foreign-sited assets may not be subject to U.S. estate tax but could be subject to estate taxes in the foreign country. The estate tax exemption applies to both domestic and foreign assets, and tax treaties may help reduce double taxation. Proper reporting is essential to avoid penalties, and it’s recommended to seek advice from an estate planner with expertise in international estate law to navigate these complexities.