Introduction
Foreign and domestic gifts and inheritances are generally received tax-free by the recipient (“donee”)”.In most cases, a foreign gift giver (“donor”) or estate pays no taxes; in contrast, a U.S. gift or estate may be subject to taxes, depending on its size.
Foreign Source Property
The general foreign gift exclusion applies to gifts of foreign property and intangible property located in the U.S. – bank transfers (checks, wire transfers), securities (stocks, partnership interests, LLC interests) and debt instruments. Transfers of U.S. real estate, however, may create gift or estate tax liability. Transfers of tangible property – cash, coins, collectibles, jewelry or artwork – changing hands while the foreign donor is physically present in the U.S. are taxable giftsFor taxable gifts, the foreign donor is entitled to the annual gift-tax exclusion (currently $13,000 in value per year, per beneficiary), but cannot use the lifetime combined estate and gift tax exemption (currently $5,000,000) for gifts exceeding the annual exclusion.
Note: U.S. securities may be transferred free of gift taxes, but are considered part of a foreign person’s U.S. estate for estate-tax purposes, which can result in an unexpected and whopping tax.
Reporting Requirements
Although foreign gifts and inheritances are not taxed, a U.S. done must report the transaction(s) on Form 3520 if the aggregate amount received from an individual or estate exceeds $100,000 during the calendar year. For example: A gift of $90,000 from and individual and a bequest from a foreign estate of $95,000 is not reported. If, however, the foreign bequest is $100,001, then both transactions and any other gifts or bequests in excess of $5,000 must be reported.
Note: The threshold reporting requirement for corporate or partnership gifts is $14,140 in 2010 (indexed for inflation).
Form 3520 must be filed by the due date of the donee’s income tax return, including extensions. Thus, a reportable gift received in 2010 must be reported when the 2010 tax return is filed, either April 15, 2011 or October 15, 2011, if there is a valid extension.
Form 3520 requires the donee’s name, address, and social security number, as well as the date, type of asset gifted and the value of the gift. The identity of the foreign donor is not disclosed.
Penalties
The penalty for late filing Form 3520 is 5% a month (to a maximum of 25%) of the value received, although the penalty may be waived for reasonable cause. Often, a beneficiary is horrified when informed there could be a $250,000 penalty for failure to timely report receipt of a $1.0 million foreign gift or bequest.
Non-Citizen Spouse Donee
A gift to a U.S. citizen spouse is entitled to an unlimited marital deduction; thus, there is no gift-tax liability. A gift to a non-citizen spouse, however, is limited to an annual marital deduction of $134,000 in 2010 (indexed for inflation).In addition, there is no marital deduction for transfers by reason of death to a non-citizen spouse, unless: (i) the transfer is to a “qualified domestic trust”; or (ii) the spouse becomes a U.S. citizen prior to the date the estate tax return is made and was a U.S. resident at all times after the date of his or her spouse.
Conclusion
Gifts and inheritances received from a foreign donor are tax-free, but there are strict reporting requirements and major penalties for failure to comply. Those receiving gifts or inheritances, or both, from individuals with a combined value exceeding $100,000 during the calendar year, need to timely report them on Form 3520.Gifts and inheritances received by a non-citizen spouse are also subject to limitations.
