Inheriting in America

11 Apr 2017 Karina S. Henkel

As foreigners we have to be a little bit more careful about paying taxes than US citizens. Maybe we have money on foreign tax accounts or we inherit something from our family back home. The IRS, the American tax revenue service, has some weird rules that apply to those cases.

I inherited a little money in Germany last year. And it was and is quite interesting (I wanted to avoid using the word frustrating) to deal with a foreign inheritance when you are a German citizen and an American resident at the same time.

I knew that I needed to get a certificate of inheritance and that the German surrogate’s court determined the value of my inheritance assets. I had to prove that I am who I am and that turned out a bit difficult when I was back in the US. Passport copies, birth certificates, etc. were sent back and forth. That all took months until I had it in my hands. Everything slowed down considerably because a lot of the paperwork had to be sent by mail – and that can take up to three weeks one way. But when I had all that in my hands I expected that the banks would give me access to my father’s bank accounts.

But no - I needed more certificates. As a German citizen living abroad I was not allowed to just inherit something. German revenue authorities had to check first whether this bequest was taxable or not. My father’s bank accounts were frozen until they made sure that I didn’t owe Germany any taxes on them.

After all that was settled, I am still dealing with a different issue. If you have more than $10,000 on foreign accounts, you are supposed to pay taxes on it (don’t ask me how much, I never had that much money in Germany). If you inherit money in the US you usually don’t have to pay taxes unless it is more than 3 or 5 million dollars. The amounts vary from state to state (never forget to look up what the federal tax rules are and what the state tax rules are – two totally different things). If you inherit something you might have to file it with your income tax statement in April of the following year. (You might want to take a look at form 3520 here).

The challenge is that nobody really seems to know what applies in such situations. I asked several financial advisors in the US and tax accountants. One of them told me that I have to pay taxes just because I am transferring funds from Germany to the US.

I am afraid that I will find out lots of these things  after the fact, and I can only hope that the American IRS won’t catch me doing anything wrong.