inheriting from the u.s. while living abroad ......1. this article assumes that assets being...

1. This article assumes that assets being transferred are non-real estate U.S. situs assets, also called U.S. situated assets, from a U.S. long-term resident/

citizen (a physical person, not a trust) who themselves is not subject to any foreign country’s tax regime.

2. This is not an exhaustive guide tailored to every individual’s situation. Each circumstance requires unique analysis. Any final determination of tax liabili-

ties should be done in conjunction with qualified local tax experts to confirm what, if any, tax amount is due in the country of residence and/or in the U.S.

Thun Financial Advisors Research ©| 2020

Thun Financial Advisors Research | Nancy Metzger and Peter Sengelmann, CFA® 2020

Thun Financial Advisors 3330 University Ave. Suite 316 Madison WI 53705 www.thunfinancial.com Skype: thunfinancial

Thun Financial Advisors, L.L.C.

is a U.S.-based, fee-only, Regis-

tered Investment Advisor that

provides investment manage-

ment and financial planning

services to Americans residing

in the U.S. and overseas.

We maximize long-term

wealth accumulation for our

clients by combining an index

allocation investment model

with strategic tax, currency,

retirement, and estate plan-

ning guidance.

We guard our clients’ wealth

as though it were our own by

emphasizing prudent diversifi-

cation with a focus on wealth

preservation and growth.

INHERITING FROM THE U.S.

WHILE LIVING ABROAD:

GIFT OR GOTCHA?

Executive Summary

For U.S. citizens receiving an inheritance while living

abroad, this article highlights key issues including:

• Estate tax treaty, domicile and residence implications

• How factors of local law, asset location, and relation to

the deceased affect inheritance tax

• Strategies to mitigate taxation and avoid surprises

Introduction

This article addresses a common but poorly understood U.S. expat scenar-

io. What happens if someone in the U.S. dies and leaves me an inheritance

while I am living abroad? Will I owe tax in the foreign country where I

live? And if so, how do bilateral treaties affect the outcome? This article is

for any American abroad who expects an inheritance of U.S.-based assets

from a U.S.-based resident.1 The information contained herein can help the

inheriting American abroad determine if, and to whom, inheritance taxes

may be due.2

mailto:[email protected]?subject=Gift%20or%20Gotcha:%20US%20Inheritance%20Questionsmailto:[email protected]?subject=Gift%20or%20Gotcha:%20US%20Inheritance%20Questions

3. This does not mean that other taxes may not apply. For example, income taxes are due from the beneficiary who receives income distributions from inher-

ited asset(s). In addition, state-level death transfer taxes may also apply.

Thun Financial Advisors Research ©| 2020 2

U.S. Estate and Inheritance

Transfer Tax Regime

The U.S. has no federal inheritance tax. The U.S.

does have a federal estate and gift tax. This means

that U.S. tax is assessed on the estate of the de-

ceased (the “decedent”). It is not assessed on the

inheriting heir (the “beneficiary”). Moreover, the

U.S. federal estate and gift tax applies only after an

individual decedent has used up his or lifetime

unified estate and gift tax credit amount of $11.58

million (2020). In practice, this means the maxi-

mum federal estate tax rate—currently 40%—

applies only to the value of the decedent’s estate

that exceeds the $11.58 million threshold. This

amount doubles to $23.16 million (2020) for a

married U.S. couple. For many of us, these high

unified credit amounts translate to no, or low, ex-

posure to the U.S. federal estate tax.3 For Ameri-

cans abroad, this means the primary estate or in-

heritance tax risk usually comes from the country

of residence, not from the U.S.

International Estate and Gift Treaty

Guidance for Americans Inheriting

From Abroad

While many countries have some form of estate or

inheritance taxes, most do not impose these taxes

on an inheritance received from abroad. Table 1

on the next page details, by country, if and how an

inheritance tax may apply to you as an inheriting

American living abroad.

As shown in Table 1, estate and inheritance tax

rules and bilateral treaties of many countries fo-

cus primarily on either the decedent’s and/or the

beneficiary’s principal residency/domicile, and on

assets’ “situs,” or location. Assets considered to be

strictly “situs” assets, such as real property locat-

ed inside a country or shares in a local company,

are taxable where they are deemed “situated.” All

treaties include some form of both the “situs” and

the “residency/domicile” approaches. The treaty

and transfer tax tables in this article, however, do

not cover some of the finer details and nuances of

transfer taxation involving the interplay of situs,

residency/domicile, citizenship, and degree of

family relation, as applied in any single country’s

or individual’s unique inheritance context.

photo by chuttersnap at unsplash

What Is an

Inheritance Tax?

Inheritance taxes are triggered after

the inheriting beneficiary is deemed

rightfully entitled to receive an as-

set transfer from the estate. The

taxable event is primarily linked to

the right to receive a transfer inci-

dent to death, not necessarily to the

actual receipt of the asset.

In many countries, the beneficiary

may opt to reject this right to re-

ceive the transfer, eliminating the

inheritance tax burden that may ap-

ply.


U.S. CITIZEN

BENEFICIARY’S*

COUNTRY OF

RESIDENCE

IS THERE AN INHER-

ITANCE TAX ON U.S.

ASSETS BEQUEATHED

BY THE U.S. DECEDENT

TO ME IN THE COUNTRY

WHERE I LIVE?

HOW LONG DOES IT

TAKE BEFORE I AM

SUBJECT TO INHER-

ITANCE TAX IN MY

COUNTRY OF RESI-

DENCE** ABROAD?

IS THERE A

BILATERAL

U.S. ESTATE

TAX or ESTATE

& GIFT TAX

TREATY IN

PLACE?

IS THERE AN EXEMP-

TION OR TAX CREDIT

AVAILABLE BY TREATY

OR BY OTHER LEGAL

SOURCE?

Australia None N/A Estate & Gift Yes, by Estate & Gift

Treaty; by tax code

Austria None, but gift tax re-

gime applies, requiring

notice filing

Subject to notice filing

requirement after six

months residency

Estate & Gift Yes, by Estate & Gift

Treaty

Canada None N/A None Yes, by U.S.-Canada In-

come Taxation Treaty

China P.R.C. None N/A None N/A

France None, by treaty. Dece-

dent’s domicile is deter-

mining factor

N/A Estate & Gift Yes, by Estate & Gift

Treaty

Germany Yes Earlier of domiciled in

Germany or deemed

domiciled for inher-

itance purposes (max

10 years per Treaty)


Treaty

Hong Kong None N/A None N/A

Ireland None, due to categoriza-

tion as U.S. situs assets

N/A Estate Only Yes, by U.S.- Ireland

Double Income Taxation

Treaty (Capital Acquisi-

tions Tax Exemption)

Italy None. Situs of assets

and decedent’s domicile

are determining factors

N/A Estate & Gift Yes, by Estate & Inher-

itance Tax Treaty

TABLE 1. Inheritance Tax Considerations by Country of Residence

4. Jusho means “principal place of residence” (i.e. domicile by habitual residence).


* We assume that the heir beneficiary is a U.S. citizen and not also a citizen of the country of residence.

** Transfer tax residency is not the same as income tax residency, although some countries do use income tax residency rules

to determine if one is subject to death transfer taxes.

U.S. CITIZEN

BENEFICIARY’S*

COUNTRY OF

RESIDENCE

IS THERE AN INHER-

ITANCE TAX ON U.S.

ASSETS BEQUEATHED

BY THE U.S. DECEDENT

TO ME IN THE COUNTRY

WHERE I LIVE?

HOW LONG DOES IT

TAKE BEFORE I AM

SUBJECT TO INHER-

ITANCE TAX IN MY

COUNTRY OF RESI-

DENCE** ABROAD?

IS THERE A

BILATERAL

U.S. ESTATE

TAX or ESTATE

& GIFT TAX

TREATY IN

PLACE?

IS THERE AN EXEMP-

TION OR TAX CREDIT

AVAILABLE BY TREATY

OR BY OTHER LEGAL

SOURCE?

Japan Yes If one has jusho4 in

Japan or 10 or more

years in Japan


Treaty

Netherlands,

The

None. Rules focus on

domicile of decedent as

determinative

N/A Estate Only Yes, by Estate Treaty

Singapore None N/A None N/A

Switzerland Maybe. Depends on re-

gional canton, degree of

lineal proximity; does

trigger wealth tax

When one has habitu-

al residence

(presumably after 90

days)

Estate Only Yes, by U.S.-Switzerland

Estate Tax Treaty and by

Swiss tax code

South Korea None, but gift tax may

apply if bringing assets

into country

More than five years

as resident S. Korea

None Yes, by federal tax code

and foreign tax credit

regime

Spain Yes, federal or regional

inheritance tax applies

N/A None No

Sweden None N/A None N/A

United Kingdom None N/A Estate & Gift Yes, by Estate & Gift

Treaty

TABLE 1. Inheritance Tax Considerations by Country of Residence cont.

5. https://www.irs.gov/individuals/international-taxpayers/some-nonresidents-with-us-assets-must-file-estate-tax-returns

6. See Table 2 at the end of this article for a detailed breakdown of lineal heir exemptions and top tax rates by country.


Inheritance Tax Treatment and

Nomenclature Varies by Country:

Factors to Consider

One nuance factor is the nomenclature. Specifical-

ly, the “inheritance” tax is not always called an in-

heritance tax. Some countries treat reporting and

taxation of inheritance under their gift tax regime

(e.g. Austria, South Korea) or under the capital

gains tax regime (e.g. Canada) when bequeathed

financial assets are involved.

Another more nuanced consideration is whether

the foreign country of residence applies a trailing

transfer tax rule, as is done in Japan. In these few

countries, the transfer tax obligation ‘trails’ along

with the citizen or long-term resident that has re-

located, even years after they have left the coun-

try.

Other nuances include whether a tax applies once

the inherited assets are brought into the host

country of residence (e.g. Ireland); or whether the

inherited asset type has a special exception by

treaty or tax code (e.g. inherited pension plan as-

sets), or due to the degree of family kinship (e.g.

surviving spouse marital exemption). In all coun-

tries, there is a time limit for claiming the tax cred-

it for foreign transfer taxes paid. The time frame is

usually between five and ten years.

Applied inheritance tax rates usually vary depend-

ing on your degree of lineal proximity to the de-

ceased. This means immediate family members

(i.e. lineal heirs) like children and spouses, com-

paratively, pay no or the lowest inheritance tax

rates compared to distant relatives or unrelated

persons.6

Notably, however, several countries do not apply

that same preferential treatment if the inheritance

is distributed via a trust, as the trust vehicle itself

may break the family tie. You are not a relative of

a trust, after all. Other countries take a different

‘look-through’ approach, meaning they look

through the trust to who is the grantor-settlor of

the trust and determine how the heir is related to

the grantor when determining what degree of

family relationship applies for inheritance tax pur-

poses.

In addition to the degree of family relationship,

several other factors apply when considering how

and whether your inheritance will be taxable in

photo by rayner at unsplash

What Is ‘Situs’?

‘Situs’ refers to the legal location of the

asset in question. It is legalese for

‘deemed situated’ in a specific location.

Not all U.S.-located assets have situs in

the U.S.5 Publicly-traded bonds in the U.S.

are a notable example (e.g. U.S. Treasury

bonds, U.S. savings bonds, corporate

bonds, municipal bonds, etc.).


Inheriting Abroad: An Illustrative

Example of Unintended Consequences

for Heirs

Applying the inheritance tax regime is complex

and anything but straightforward. This is especial-

ly the case if one or more taxing jurisdictions are

involved. The international two-jurisdiction exam-

ple provided below helps illustrate how some of

these general treaty principles and rules of inher-

itance taxation may apply. The example below is

not intended to calculate the taxes due, but rather

for familiarizing you, the reader, on how to apply

an inheritance tax regime, generally.

FACTS and LAW: U.S. citizen Jane has been living in

Japan for the past 17 years. Her American parents

die and leave her, the sole surviving immediate

family member, an inheritance of $3,000,000 in

their U.S. brokerage account. Jane’s parents have

never been to Japan, have no assets in Japan, and

have never even visited Jane in Japan. Regardless,

the U.S.-Japan Estate and Gift Tax Treaty and Japa-

nese law, as applied, considers whether either the

decedent or the inheriting beneficiary has domi-

cile in Japan, when determining which country has

primary taxing jurisdiction over the bequest. Since

Jane has domicile/long-term residency in Japan,

Japan’s inheritance tax laws will apply to her.

What’s the Difference Between an Estate Tax

and an Inheritance Tax?

Is there any practical difference between an estate tax and an inheritance tax? Logic sug-

gests that the two are one and the same. Yet, the distinction can produce materially differ-

ent financial outcomes for the inheriting individual. An estate tax is imposed upon the de-

ceased person’s estate. An inheritance tax is imposed on the persons inheriting, or heirs.

Under an estate tax regime, heirs receive transferred assets net of estate taxes already

paid by the estate and its Executor. Under an inheritance tax regime, heirs have the right

to receive the asset bequeathed, subject to inheritance taxes payable. In other words, in-

heritance taxes become the inheriting person’s tax liability, not the estate’s tax liability.

your host country. The first factor is the treaty

itself. Does the bilateral Estate and Gift Tax Trea-

ty, by implementing practice or by explicit text,

include within its scope special exceptions or

conditions that apply? Check the treaty for any

explicit text indicating whether the credit meth-

od (pro rata reduction for tax paid) and/or the

exemption method (reciprocal partial or full tax

relief) from transfer taxes may apply, and if so,

under what circumstances and limits. In most

treaties, the credit method is more commonly

used, and the exemption method is seldom used.

This means tax credit, at best, is usually the trea-

ty claim option available to inheriting Americans

abroad.

Other factors include what kind of asset is sub-

ject to the transfer tax. For example, many trea-

ties have special carve-out exceptions for foreign

pension plan assets or situs real estate like a

family home. Another factor is whether the

transfer tax would result in taxing the same asset

twice or paying the same tax twice. If so, many

countries (and some U.S. states) permit a foreign

tax credit, or partial exemption, for transfer tax-

es already paid on the very same asset. This is in

the spirit of avoiding double taxation.


Japan uses a marginal inheritance tax regime, with

tax rates applied progressively and ranging from

10-55% of the inherited net taxable asset value.

Marginal tax regimes are commonly used for in-

heritance tax regimes in many countries. The larg-

er the inheritance value, the more likely it is that

the top marginal inheritance tax rate of 55% will

apply. This is also typical—the larger the value,

the higher the applicable marginal tax rate.

In Japan, financial assets are valued at fair market

value as of her parents’ death date, and the inher-

itance tax is due and payable not later than 10

months after the date of her parents’ death.

While a 55% inheritance tax rate does sound

daunting, several steps of the inheritance tax re-

gime, once applied, may lower the effective tax

rate below the stated 55%.

APPLICATION of LAW: The first step is determin-

ing the net value of aggregate assets subject to in-

heritance tax. Japanese law (like many other coun-

tries’ laws) permits deductions from the gross tax-

able inheritance amount for funeral and burial ex-

penses. Next, Japan permits a basic exclusion

amount for each beneficiary, again reducing the

taxable inheritance amount. As applied, this

means the greater the number of heir beneficiar-

ies, the greater the number of exclusions apply,

reducing further the aggregate asset base subject

to inheritance tax in Japan.

Because Jane is an immediate family member, Jap-

anese inheritance law and tax regime (like that in

other countries) affords Jane an additional inher-

itance marginal tax deduction amount, once again

applied to reduce her share of inheritance tax pay-

able. The remaining balance after the deductions,

exclusions and credits is the individual’s share of

net taxable inheritance value:

(individual share of net taxable inheritance value)

x (individual’s inheritance marginal tax rate) =

inheritance tax amount payable to Japan.

In Jane’s case, she will have a Japanese inheritance

tax payable not later than 10 months after her

parents die. Jane’s parents’ estate will have no U.S.

federal estate tax due to the very high U.S. exemp-

tion threshold of $23.16 million ($11.58 million

per individual x 2) before the 40% federal estate

marginal tax applies. Jane’s parents’ estate value

(assuming it is just the brokerage account) is un-

der this $23.16 million threshold.

photo by andre guerra at unsplash

UNINTENDED CONSEQUENCE: Regardless of the

fact that no U.S. federal estate tax is due, Jane may

have a dilemma in coordinating the timing of the

inheritance tax due and payable to Japan. If she

has not yet received her inheritance from her par-

ents’ estate back in the U.S., how will Jane pay a

sizeable inheritance tax to the Japanese govern-

ment within 10 months of the date of death? Sud-

denly, that $3,000,000 gift becomes a ‘gotcha,’ if

Jane must come up with a six-figure U.S. dollar

amount on her own to pay the inheritance tax to

Japan. This is where advance financial planning

and use of cross-border estate planning strategies

can be most helpful for internationally-based fam-

ily members.


Loved ones who may have already made elaborate

plans to leave their remaining assets to you upon

their passing may not realize that doing so may

have unintended consequences. Some of those

originally-drafted plans may need to be adjusted

to fit your cross-border context, if your family

members or benefactors want to leave you their

legacy while you are still abroad.

Determining If Inheritance Tax May

Apply in a Treaty Country and If So,

What to Do About It

How the law applies in different countries and

cases involving international estate and inher-

itance taxes is often based on practice, interpre-

tive opinions or regulations issued by the respec-

tive country’s taxing authorities, or tribunals. In

many countries, however, the official guidance

around these types of taxes and how they apply in

foreign tax credit cases is scarce. This leaves few

options for the inheriting U.S. citizen abroad to

evaluate whether and how to pursue their tax

credit claim.

Consulting with knowledgeable expat tax advisors

who have experience with Americans abroad and

with filing tax credit claims can be helpful. Similar-

ly, engaging experienced local legal counsel can be

effective for evaluating and advancing any tax

credit claims and/or appeals. Another option is to

calculate whether paying the inheritance tax is

less costly than the time and expense involved in

pursuing the tax credit claim. After adding up all

the costs for translation, legalization, record-

keeping, and administrative and professional ser-

vices, one may find that the end result is not worth

the hassle. In such cases, often the most practical

option for an inheriting American abroad is either

to:

a) disclaim the inheritance, thereby ridding one-

self of the inheritance related tax liability of

the host foreign country; or

b) pay the inheritance tax and seek an estate tax

expense deduction in the U.S. for any inher-

itance tax paid in the foreign host country to

acquire the inherited asset in the U.S.

The latter approach may be less questionable (i.e.

more acceptable) to the U.S Internal Revenue Ser-

vice (IRS), although admittedly less valuable to the

inheriting American abroad. One of the reasons

the option is distinctly less valuable is because it

presumes that there is a U.S. federal estate tax

due, against which the foreign tax credit may ap-

ply as an offset. Given the high $11.58 million

threshold amount before any U.S. federal estate

tax is triggered, this would be a very rare circum-

stance.

Can I Apply My Foreign

Inheritance Tax Credit to a

U.S. State Tax Due?

Can inheriting Americans abroad make a

tax credit claim by treaty for transfer

taxes paid to a U.S. state or vice versa?

The most likely answer is “no”. General-

ly, the scope of any bilateral U.S. Estate

and Gift Tax Treaty deals with federal

level, not state level, taxation. Some

states and countries, however, do permit

pro rata credit for regional level taxation

paid, in the spirit of avoiding double tax-

ation. Other bilateral Estate and Gift Tax

treaties state explicitly whether state-

level taxation is included within their

scope.


Jurisdiction Top Rate to Tax Type

Australia 0% _

Austria 0% _

Belgium 30% Inheritance Tax

Bermuda 20% Estate Tax Stamp Duty

Brazil 8% Estate Tax

Bulgaria 1% Inheritance Tax

Canada 0% _

Chile 25% Estate Tax

China 0% _

Croatia 5% Estate Tax

Denmark 15% Inheritance Tax

Ecuador 35% Inheritance Tax

Estonia 0% _

Finland 19% Inheritance Tax

France 45% Inheritance Tax

Germany 30% Inheritance Tax

Greece 20% Inheritance Tax

Hong Kong 0% _

Hungary 0% Inheritance Tax

Iceland 10% Inheritance Tax

Ireland 33% Capital Acquisitions Tax

Israel 0% _

Italy 4% Inheritance Tax

Jamaica 2% Transfer Tax (rates spe-

cific to death)

Japan 55% Inheritance Tax

TABLE 2. List of Estate and Inheritance Tax Rates Worldwide

Jurisdiction Top Rate to

Lineal Heir

Tax type

Lithuania 0% Inheritance Tax

Luxembourg 0% Inheritance Tax

Macedonia 0% Inheritance Tax

Mexico 0% _

Morocco 0% Estate Tax

Netherlands 36% Inheritance Tax

New Zealand 0% _

Norway 0% _

Philippines 20% Estate Tax

Poland 7% Inheritance Tax

Portugal 0% _

Puerto Rico 10% Estate Tax

Russia 0% _

Serbia 0% Inheritance Tax

Slovenia 0% Inheritance Tax

South Africa 20% Estate Duty

South Korea 50% Inheritance Tax

Spain 34% Estate Tax

Sweden 0% _

Switzerland 7% Inheritance Tax

Taiwan 10% Estate Tax

Tunisia 0% Inheritance Tax

Turkey 10% Inheritance Tax

United Kingdom 40% Inheritance Tax

United States 40% Estate Tax

Source: Family Business Coalition and Tax Foundation


“Thun Financial Advisors is a Creative Planning, LLC company. Creative Planning, LLC (“Company”) is an SEC registered investment

adviser located in Overland Park, Kansas. This commentary is provided for general information purposes only and should not be

construed as investment, tax or legal advice, and does not constitute an attorney/client relationship. Past performance of any mar-

ket results is no assurance of future performance. The information contained herein has been obtained from sources deemed reli-

able but is not guaranteed.”

Thun Financial Advisors Research is the leading provider of financial planning research for cross-border and American ex-

patriate investors. Based in Madison, Wisconsin, Thun Financial Advisors’ Research has been featured in the Wall Street Jour-

nal, Emerging Money, Investment News, International Advisor, Financial Planning Magazine and Wealth Management among

other publications.

Please visit our website for the most up -to-date articles and press or email us with any additional questions.

Contact Us Thun Financial Advisors 3330 University Ave Suite 316 Madison, WI 53705 608-237-1318

Visit us on the web at

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Conclusion

Reviewing the U.S.-Foreign Country Estate Tax Treaties and host

country laws on inheritance, gift, and estate transfer tax regimes can

provide valuable insights into the potential implications of inherit-

ing while abroad. Americans abroad can anticipate and use estate

planning strategies as part of a broader financial planning effort to

avoid getting hit with a surprise inheritance tax. If you are facing an

issue of an inheritance tax abroad, there are a variety of inter-

generational investment and financial planning strategies that can

be employed to avoid or limit potential country of residence inher-

itance tax impact. Often, this will require coordinating with loved

ones who may be planning to leave you a bequest, discussing with

them in advance what will likely trigger the adverse tax impact and

possible strategies to mitigate that impact. Doing so can not only re-

sult in significantly material savings, but also avoiding the regret of

not having adequately prepared. Advance planning can save a family

large amounts of time, money, and stress.

If you are an American abroad with a potential inheritance issue,

Thun Financial Advisors can help you navigate the complexities of

your unique family and international circumstances. We hope this

article is one step in that direction.

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