The basics of #Americansabroad and inheritances – with a touch of expatriation

Anything to do with U.S. tax is of course complicated. That said here are some basic principles.

The basic principle – you can inherit free of U.S. tax

Whether a U.S. person is living inside or outside the United States:

In the United States, a gift or inheritance which results from a person’s death is known as a testamentary gift. With one exception, the IRS does not impose any estate or inheritance tax obligations onto beneficiaries of testamentary gifts. Furthermore, a testamentary gift is not considered taxable income and should not be included in the determination of such income on Form 1040.


In the previous paragraph, we indicated there is one exception to the taxation of testamentary gifts. That exception is in the event the testamentary gift came from a foreign individual who had once been a US Citizen or Green Card Holder and renounced his/her citizenship. While this is a rare circumstance, it can occur. If you are the beneficiary of a will belonging to such an individual, you will be able to exclude up to $14K (the annual exclusion amount for 2013) but may be required to pay taxes on the rest. Cases involving a renounced citizen or green card holder can be complex and may require additional forms or other responsibilities. If you are involved in such an inheritance, it’s important to seek the advice of a qualified tax attorney orinternational tax advisor.

Simple – But, consider the “covered expatriate” as a creator of tax liability

The big problem in my example is that Fred’s parents had modest wealth–far beneath the estate tax threshold for them of $5.25 million each. Yet their $1,500,000 of net worth will be taxed at the highest possible estate tax rate. Money that should never have been taxed will now be taxed, simply because it went through the hands of a covered expatriate.


What can the players in this game choose as a tax-minimizing strategy? Well, don’t die, of course. But after that, the options available are limited:

  • A covered expatriate should not allow inheritance of assets at death by U.S. taxpayers. In other words, Fred should disinherit his kids.
  • A recipient should not be a U.S. citizen. In other words, Fred’s two children should follow their father and renounce their U.S. citizenship.
  • A U.S. citizen should not pass wealth to a covered expatriate if the successor inheritor will be a U.S. citizen. In other words, Fred’s parents should have configured their will to skip Fred. They should have left everything to their two U.S. citizen grandchildren. Alternatively, they should have created a trust in which Fred had an income interest for life, with Fred’s two children as the remainder beneficiaries.


So the best thing probably is to cut Americans abroad out of the will.

One wonders, why does this all have to be so complicated? Those who want confirmation of the complexity might find this to be of interest.