A foreign inheritance is not taxable income to a U.S. beneficiary, but foreign estate tax rules still reach two places that catch people off guard: information reporting to the IRS on money or property received from abroad, and U.S. estate tax on any U.S.-located assets a nonresident decedent leaves behind. The exemption for a nonresident’s U.S. assets is only about $60,000, and the penalty for failing to report a foreign bequest can reach 25% of its value. Knowing which forms apply, and by when, is the difference between a clean administration and a costly one.
When an Estate Counts as Foreign
Under 26 U.S.C. § 7701(a)(31)(A), an estate is “foreign” when its income from sources outside the United States, and not connected to a U.S. trade or business, falls outside U.S. gross income.1Office of the Law Revision Counsel. 26 U.S.C. 7701 – Definitions In practice, an estate administered abroad for a decedent who was a nonresident alien is almost always foreign for U.S. tax purposes.
Classification matters because it drives which forms apply, how the estate’s income is taxed, and what exemptions are available. One caution: the “Court Test” and “Control Test” people sometimes cite belong to the trust rules, not the estate rules.2eCFR. 26 CFR 301.7701-7 – Trusts, Domestic and Foreign For estates, the income-treatment rule above is the one that governs.
Is a Foreign Inheritance Taxable Income?
No. Under 26 U.S.C. § 102(a), gross income does not include property acquired by bequest, devise, or inheritance.3Office of the Law Revision Counsel. 26 U.S.C. 102 – Gifts and Inheritances That exclusion applies whether the estate is domestic or foreign, and whether you inherit cash, real estate, or securities.
There is one boundary. Income the inherited property generates after you receive it is taxable. Inherit a $200,000 foreign bank account, and the principal is not income; the interest it earns going forward is. If the estate distributes income it earned during administration rather than principal, that piece can also be taxable to you as a beneficiary. Keep the two categories separate in your records from day one.
Reporting a Foreign Bequest on Form 3520
The inheritance is not taxable, but the IRS still wants to know about it. If you receive more than $100,000 in total during a tax year from a nonresident alien or a foreign estate, you must file Form 3520, the Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts.4Internal Revenue Service. Instructions for Form 3520 The threshold is aggregate — one distribution or ten, if the year’s total from that foreign source clears $100,000, you file.
Beneficiaries report the bequest in Part IV, describing each item received — cash, real estate, or investments — along with the decedent’s country of residence and the fair market value of each asset at the date of distribution.5Internal Revenue Service. Form 3520 – Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts For real property, that usually means a professional appraisal. For financial assets, bank or brokerage statements as of the distribution date will do. You also need identifying information for any foreign fiduciaries: names, addresses, and taxpayer identification numbers if they exist.
Form 3520 cannot be filed electronically. Mail it to the Internal Revenue Service Center, P.O. Box 409101, Ogden, UT 84409.4Internal Revenue Service. Instructions for Form 3520 The deadline tracks your personal income tax return, and if you extend Form 1040 to October 15, Form 3520 extends with it. Use certified mail with tracking. If the IRS says it never arrived, proof of timely filing is on you.
Estate Tax on U.S. Assets of a Nonresident Decedent
When a nonresident alien dies owning property located in the United States, that property can be subject to U.S. estate tax even if the decedent had no other U.S. ties. The executor must file Form 706-NA if the U.S.-situated assets exceed $60,000 in value.6Internal Revenue Service. Some Nonresidents With U.S. Assets Must File Estate Tax Returns
What Counts as U.S.-Situs Property
- Land and buildings physically located in the U.S.
- Tangible personal property such as artwork, vehicles, and jewelry located in the U.S. at the time of death.
- Stock in U.S. corporations, wherever the certificates are held.7Office of the Law Revision Counsel. 26 U.S.C. 2104 – Property Within the United States
- Certain debt obligations of U.S. persons and of federal, state, or local governments.
Assets that generally escape U.S. estate tax for nonresidents include bank deposits at U.S. institutions (with some exceptions), insurance proceeds, and property located entirely outside the country.
Rates and the Unified Credit Gap
The rate schedule is the same graduated 18% to 40% that applies to U.S. citizens.8Office of the Law Revision Counsel. 26 U.S.C. 2101 – Tax Imposed The exemption is where nonresidents lose ground. A U.S. citizen or resident has an exemption of $15 million per individual in 2026. A nonresident alien estate gets a unified credit of only $13,000, which shelters roughly $60,000 in asset value.9Office of the Law Revision Counsel. 26 U.S.C. 2102 – Credits Against Tax A nonresident owning a $500,000 U.S. condo is exposed to tax on nearly the full value; a U.S. citizen would owe nothing on the same asset.
Treaty Relief
Estate tax treaties can close much of that gap. Countries including Canada, Germany, Finland, and Switzerland have treaties with the United States that provide an enhanced credit, typically a proportional share of the full U.S. citizen credit based on the ratio of U.S.-situated assets to worldwide assets.10Internal Revenue Service. Instructions for Form 706-NA If a German resident’s worldwide estate is $2 million and $400,000 is U.S. real estate, the estate may receive 20% of the full citizen credit rather than the default $13,000. Claiming a treaty position requires filing Form 8833 with the return.11Internal Revenue Service. About Form 8833, Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b)
Ongoing Reporting Once You Inherit Foreign Accounts
Inheriting a foreign bank or brokerage account creates reporting obligations that outlast the estate itself. Two separate filings can apply. They are not interchangeable.
FBAR (FinCEN Form 114)
If the combined value of all your foreign financial accounts exceeds $10,000 at any point in the calendar year, you must file an FBAR electronically through the BSA E-Filing system.12Financial Crimes Enforcement Network. Report Foreign Bank and Financial Accounts The threshold is aggregate across all your accounts, and inheriting a single account can push you over when combined with anything you already hold.
Form 8938 (FATCA)
Form 8938 covers a broader category of “specified foreign financial assets,” including foreign stock, partnership interests, and financial instruments issued by foreign entities. Thresholds depend on filing status. For single filers living in the U.S., total value over $50,000 on the last day of the year, or $75,000 at any point during the year. For joint filers living in the U.S., $100,000 on the last day or $150,000 at any point.13Internal Revenue Service. Do I Need to File Form 8938, Statement of Specified Foreign Financial Assets?
You may need to file both. The FBAR goes to FinCEN; Form 8938 goes to the IRS with your income tax return. They cover overlapping but different asset categories and carry separate penalties. Treating one as a substitute for the other is a common and expensive mistake.
Deadlines at a Glance
- Form 3520: due with your personal income tax return, typically April 15, with an automatic extension to October 15 if you extend Form 1040.4Internal Revenue Service. Instructions for Form 3520
- Form 706-NA: due nine months after the decedent’s death. An automatic six-month extension is available by filing Form 4768 before the original deadline.10Internal Revenue Service. Instructions for Form 706-NA
- FBAR: due April 15 for the prior calendar year, with an automatic extension to October 15 that requires no request.14Internal Revenue Service. Report of Foreign Bank and Financial Accounts (FBAR)
- Form 8938: filed with your income tax return, so April 15 with the usual extension rules.
Executors based abroad may qualify for additional time beyond the standard six-month extension on Form 706-NA upon a showing of good cause.15eCFR. 26 CFR 20.6081-1 – Extension of Time for Filing the Return
Penalties for Missing These Filings
Penalties in this area are harsh by design. Congress built the structure to deter offshore tax evasion, which means a beneficiary who simply did not know about a form faces the same penalty framework as someone hiding assets.
Failing to report a foreign bequest on Form 3520 triggers a penalty of 5% of the unreported amount for each month the failure continues, capped at 25%.16Internal Revenue Service. Gifts From Foreign Person On a $500,000 inheritance, that is $25,000 per month up to $125,000 total. The penalty applies even though no tax is owed on the inheritance itself.
Missing Form 8938 starts at a $10,000 penalty. If you still have not filed 90 days after an IRS notice, additional $10,000 penalties accrue for each 30-day period, up to $50,000 more. If the failure produces an underpayment of tax tied to undisclosed foreign assets, an accuracy-related penalty of 40% applies to the underpayment.17Internal Revenue Service. Instructions for Form 8938
Non-willful FBAR violations run up to $10,000 per account, per year. Willful violations reach the greater of $100,000 or 50% of the account balance at the time of the violation, and criminal prosecution is possible. Small balances do not reliably keep a case out of enforcement.
All three penalties allow a reasonable-cause defense, but the bar is high. You need to show you exercised ordinary care and were still unable to comply — not that you were unaware of the rule, and not that your accountant failed to mention it.18Internal Revenue Service. Penalty Relief for Reasonable Cause Qualifying circumstances tend to look like serious illness, natural disaster, or an inability to obtain records from abroad. If you discover a past failure, addressing it through one of the IRS’s voluntary disclosure programs generally produces a better outcome than waiting to be found.
Converting Foreign Currency for U.S. Filings
Values on IRS forms must be in U.S. dollars. The IRS requires using the exchange rate prevailing on the date you receive, pay, or accrue the item.19Internal Revenue Service. Foreign Currency and Currency Exchange Rates For Form 8938, use the U.S. Treasury Department’s Bureau of the Fiscal Service rate as of the last day of the tax year. If Treasury does not publish a rate for the currency, another publicly available rate is acceptable, but the source must be disclosed on the form.20eCFR. 26 CFR 1.6038D-5 – Valuation Guidelines Keep records of the rate you used and where it came from. Rate movement between the date of death and the date of distribution can produce meaningfully different reported values, and a clear paper trail resolves any IRS question quickly.
Ancillary Probate for Inherited U.S. Real Estate
If the foreign decedent owned real property in the United States, the home-country probate cannot transfer that property directly. U.S. real estate passes under the law of the state where it sits, which means a secondary court proceeding is required there. That proceeding is called ancillary probate.
The executor generally files the foreign will, along with the executor authorization from the primary proceeding, in the local probate court. Most courts accept a will already validated abroad without requiring independent proof of validity, though the documents typically must be authenticated. Countries in the Hague Apostille Convention can usually satisfy that with an apostille; other countries may need consular legalization, which takes longer. Foreign-language documents need certified translations.
The court appoints a representative — sometimes the same executor, sometimes a local attorney — to handle the U.S. property, settle outstanding property taxes and local debts, and eventually transfer the deed to the heirs. Filing fees vary by jurisdiction, typically running from under $100 to several hundred dollars. The ancillary case runs alongside the primary administration abroad. Until it closes, the heirs cannot legally sell or refinance the U.S. real estate.
State Inheritance Tax
Federal rules dominate cross-border estate administration, but five states impose their own inheritance tax on property passing to beneficiaries. Rates range from 0% for surviving spouses and, in most cases, direct descendants, up to 16% for more distant relatives or unrelated beneficiaries. Exemption thresholds and brackets vary widely, with some categories exempting as little as $1,000. If the U.S. property sits in one of those states, the ancillary representative should factor state inheritance tax into the settlement alongside any federal estate tax obligation.