# Inheritance and gift tax - IRS



## Jonathan12

I understand that if somebody has outstanding debts, particularly to the tax man, that the inheritance will be eaten up by that first and foremost, before the heirs get anything.

However, what about previous gifts? It is possible my father will have a tax bill to settle soon, no idea what the situation is really, but it might continue into when it is the estate dealing with it. I get that this might mean that the small inheritance will disappear, but over the years, he has also sent me some monthly monies to help with bills, mortgage, etc., unfortunately I think without filling out a gift tax form. I am hoping this wouldn't matter much since it never has, and never will even with the inheritance, come close to the limit where any of it would be taxed anyway. He's starting to have some dementia so I can't really speak to him about this type of thing as he doesn't really understand taxes anymore.

However, since gifts do have an impact on the inheritance amount, does that mean that they could come and try to get these moneys off of me to pay off his bills, even though that money was sent regularly each month over years from his yearly income (ie not trying to escape any sort of inheritance bill, which would have never existed anyway given the amounts)? I was never aware of this gift tax form, and I guess neither was my father (and as mentioned, it was irrelevant anyway given the small amounts - it'd never have impacted on the inheritance tax), and given that most of that monthly money is spent in the month it arrives, I'd have no facility to pay. The estate would, if there is anything left, go first to my mother as she's still around, but I doubt she'd have any facility to pay either which is why I am wondering if they would chase these. All of us live outside the US.

Thanks for the help!


----------



## Bevdeforges

If the "gifts" from your father amounted to less than $10,000 to $14,000 in a given year (the precise amount varies by year), then they weren't subject to any reporting requirement and won't be taken into account in any inheritance situation. Then, too, you could get up to the limit amount from each of your parents each year without tax consequences.

True, taxes owed are the first to come out of the estate - but they come out of what's left at the time the person dies.

And, if you're all outside the US, there's a reasonable chance the US won't get involved at all unless your father's estate amounts to several $million, in which case, paying the upcoming tax bill probably won't pose a problem. The main inheritance tax concerns involve the country in which your parents are resident at the time of their deaths. (And yes, the local tax people may notify the US IRS about the death, but unless the estate is worth more than the threshold amount it's unlikely anything will happen.)
Cheers,
Bev


----------



## Jonathan12

Thanks for the response! The amounts go over the reporting thresholds for each year (but not by too much), so there would have been a requirement for those forms.

The estate will be very, very significantly below several million haha. So no worries there. 

So are you saying that due to the lower figure and all living abroad, that it is likely that the tax bill (if it exists) simply disappears upon death, and isn't transferred to my mother, or do you mean that they would demand everything in the estate? It'd be a shame to lose everything in the estate, as my mother doesn't work, so it's money meant to see her out. My mother is not a citizen but never formally returned her green card so we only just learned that her reporting requirements continue.

I am considering putting my parents in the streamlined procedure in order to amend past tax returns and begin FBAR filings as neither of them ever understood (and certainly not recently, with my dad developing dementia) the requirements, both for what to file in the tax return as well as FBAR. I'm pretty sure they would not owe any tax whatsoever (and if they did, it'd be minimal), but there's a lot of things in their country of residence that were never reported both on the tax form (particularly around a possible trust for my dad's business there, if that's even what it is...not totally sure) as well as the FBAR that neither knew they were meant to file. So the tax bill I refer would come from massive penalties relating to these if the IRS disagrees with the 100% correct explanation that the errors and failures to report were totally non-wilful and due to lack of knowledge and understanding. It's never been an issue up until now, but to avoid any issues when it comes to inheritance/estate settling, I am thinking of gathering all the info and doing all these tax returns and FBARs for them. Not sure what to do though, really. They're both old and just living life day to day, not having stepped foot in the US for countless years, and without ever having meant any harm...I don't want to scare them by trying to explain all this and get all the info needed from the past few years and file knowing the possible consequences. Any suggestions?


----------



## Bevdeforges

OK, now this is a somewhat more complicated situation than what you originally mentioned.

Your mother is probably more or less in the clear on all of this. Though she didn't turn in her green card on her departure, she's still a NRA (non-resident alien) and technically speaking doesn't have a tax filing obligation. At least that's the case after her first year outside the country, when her green card turns into a pumpkin. It's really doubtful the IRS cares at this point about her "failure to file" after so many years.

Your father, as a US citizen, could conceivably go through the streamlined program to clear his name - and it's only the current year plus 3 years back. If he didn't owe anything during that time, then it's more or less all forgiven. But then you're on the hook for filing him going forward.

At this point, I wouldn't worry too much about the "gifts" to you over the years. There isn't really a tax due on those things - they just add it all up when settling the estate tax and count it as the part of your inheritance you've already taken. But there is also an argument that some or all of the money was not necessarily a gift if it was helping you out with your day-to-day expenses.

The other thing to consider is what level of income and assets we're talking about here. US taxes are based on worldwide income and assets. But unless you're in a position where it's clear there were taxes due and/or avoided, it's unlikely they'll hit you up with those nasty penalties solely on the "failure to file" thing. In this case, you might even consider back filing the 6 years of FBARs using "best estimates" for the high balances as long as you have the account numbers and bank addresses for the relevant accounts. There's little or no evidence that they're going to match up amounts reported - certainly not for back filings anyhow. The important thing is to make an honest attempt to disclose, and if they come back with questions, you can explain your Dad's condition and how you made your estimates, given the situation.
Cheers,
Bev


----------



## BBCWatcher

A couple more questions:

1. You mentioned bills. Did your father pay any of your medical bills? Anybody can pay anybody else's medical bills, and that's not generally considered a gift. How about education expenses, such as college tuition? That's generally the same thing, not considered a gift.

2. Is your father's estate plus the value of his gifts worth anywhere near $5.43 million? If not, the U.S. estate tax will be zero.

OK, now a comment. Medicaid is one of the areas to be familiar with. Various states have strict rules about "clawback" should your father require Medicaid-funding care, notably nursing home care.


----------



## Jonathan12

Re the gifts, there were no medical or tuition bills, however they were gifted in that it was for me to use as I see fit. It was thus combined with my own pot of money. Some went for general expenses, especially when a student, a lot was saved, especially now that I work, some was used for other things like trips, etc. 

Re the estate+gifts = it would be much closer to 0 than 5.43 million. We're talking barely six figures.

There'd be no medicaid involved (and never has been) given he's pretty much lived his whole adult life outside the US.

I read that green card holders, regardless of how long they live abroad, continue to have a reporting requirement until they officially relinquish the green card. Maybe I'm wrong. My mom's still been filing in the sense that she's part of my dad's return as a joint return, so the mistakes are, in effect, hers too.

I'm happy to clear his name and then do his taxes for him, once I actually understand everything and how it works in terms of their affairs for filing all this in the first place, it'd be simple enough going forward I am sure. You say all would be forgiven if there was nothing due, which I imagine would be the case, but what would be the situation if there were to be tax due? I'm sure it wouldn't be a big amount, but until/if I get all the details and work it all out myself, I don't know for sure, as I've never been involved in my parents' finances. Would this make it all more troublesome? Obviously I'd make sure any tax due is paid. I guess one wider issue is if I'd actually manage to gather all the information required, especially given their lack of understanding of all this. (P.S.: if I do gather everything and no tax is actually due despite things not having been reported, can just a delinquent filing of FBARs without the streamline process/amendment sort it all out?)


----------



## Bevdeforges

BBCWatcher said:


> OK, now a comment. Medicaid is one of the areas to be familiar with. Various states have strict rules about "clawback" should your father require Medicaid-funding care, notably nursing home care.


Unlikely, as the OP says that his parents haven't set foot in the US for "countless" years. Medicaid is state-based and thus not something overseas residents would be concerned with.
Cheers,
Bev


----------



## JustLurking

Bevdeforges said:


> ...Your mother is probably more or less in the clear on all of this. Though she didn't turn in her green card on her departure, she's still a NRA (non-resident alien) and technically speaking doesn't have a tax filing obligation. At least that's the case after her first year outside the country, when her green card turns into a pumpkin. It's really doubtful the IRS cares at this point about her "failure to file" after so many years.


Ummm... sorry Bev but this is not right. See pub 519. The ever helpful Phil Hodgen summarises:



> People have green cards. They leave the country and stay out of the United States so much that they might be considered to have abandoned their permanent immigrant status. Or the green card expires.
> ...
> I regularly talk to people who had green cards and moved abroad 10 or 15 years ago. They stopped filing U.S. tax returns under the assumption that they were no longer U.S. residents.
> 
> Wrong.
> 
> You are still a lawful permanent resident in the eyes of the U.S. government and should be filing income tax returns.


----------



## Bevdeforges

It depends. Tax purposes are one thing, immigration can be another.

Immigration may stop letting you enter the country on a green card once you've given up your residence.

And, for tax purposes, it can depend on just when you "abandoned" your US residence. It's not a simple question.
Cheers,
Bev


----------



## Jonathan12

Either way, she's been included in joint returns, so that aspect doesn't matter too much I suppose. Any thoughts on the risk level of streamlined if there is any tax due?


----------



## maz57

This sounds to me like a situation where trying to "fix" things could well make things worse. Your parents have lived for years outside of the US, have apparently been dutifully making a good faith effort to file their US return each year, and the IRS has apparently been happy with what they have been doing. Trying to enter the Streamlined program at this point would only draw attention to whatever errors or omissions may have occurred over all those years.

My sense is that it would be best for your parents to just continue muddling along as best they can. Eventually your father will pass away and your mother will inherit your father's half of their joint assets without any US tax consequences if it is below the exemption for US estate tax which is currently 5.43 million. She will also assume the unused balance of your father's estate exemption so that her estate will have something close to 10 million of available exemption when she passes. (State estate tax is different from the federal but in this case its moot because they don't live in the US.) His estate will be so far under the threshold that I don't think an estate tax return will even be required. (Worth checking to confirm that, however.)

All of this water under the bridge in the form of gifting over the years is best just left alone. It sounds as if it would have made no difference anyway even if it had been correctly reported because it would have merely somewhat reduced that far more than adequate available estate tax exemption.

If all of this is occurring outside of the US with no US assets the IRS really has no leverage assuming they even notice anything at all. Let the US sleeping dogs lie. I think it might be far more important to consider what the estate and inheritance rules are where your parents actually live and where their assets are located. The local tax men are the ones who will really need to be satisfied.


----------



## Bevdeforges

Jonathan12 said:


> Either way, she's been included in joint returns, so that aspect doesn't matter too much I suppose. Any thoughts on the risk level of streamlined if there is any tax due?


Oh, that begs another question - has your father been filing all along? 

As far as the risk of the streamlined goes, it depends on how much tax there is due. (Though if he has been filing these last few years, you'd be filing amended returns, not necessarily part of the streamlined program.)
Cheers,
Bev


----------



## Jonathan12

The new streamlined program seems, to me, to allow for amended returns, no? And yes, he has been filing all along - but just in the same way that he always has, so the same mistakes being made each year as to what needs to be put there, and of course with no fbars. I think the amount of income underreported is a bit big, proportional to what was reported, but I think still well within the foreign income exclusion amount meaning no tax. If no tax is owed but the proportion is big, would that be just as risky?

Thanks for the opinion, maz. It is delicate. Nothing has ever come up before and there's never been an issue but obviously with facta etc, it is all easier to find now. But at the same time, neither parent, due to lack of language/knowledge/internet access/habit/etc. knew what they were meant to be doing and just did it the way they've always done it, so these mistakes have always been present, and certainly not on purpose. And I do worry that if I try to bring all this to their attention, and try to somehow get all this info and report it all correctly now, it could give them a total heart attack. My father is in his 80s, mother not much younger. 

And re gifts, yeah all that makes sense. My main concern I suppose was if they ended up with loads of penalties as a result of the above...it'd be nasty to lose all their savings/future inheritance, if they got huffy via the streamlined program or at inheritance time when forms are being filed out or simply by eventually catching these mistakes, but even nastier would be if they then tried to chase the little that I have for it.

All this is so stressful. I honestly don't understand why the US does this to expats.


----------



## Bevdeforges

Maz57 has a really good point. Unless your parents have significant assets in the US that would be at risk, I'd let sleeping dogs lie. Your parents are not the only folks out there who have been filing as they think they are supposed to, and the IRS really doesn't have the funds nor the resources to go after little old people overseas who have been making good faith filings all these years. There is much more to be gained hunting down those who are actively hiding income or assets in willful violation of the law.

If your parents' estate is below the estate tax filing limit, there will be no need to even file a "final" income tax return nor an estate tax filing for them. As maz said, more important to be aware of the inheritance tax conditions where they are currently resident.
Cheers,
Bev


----------



## Jonathan12

Thanks Bev. Would that advice apply even in the event tax is owed (ie if they did go over the exclusion limit)? I wouldn't know for sure until I asked for all the figures and tried to compute it all.

They have no assets at all in the US, everything is in their current residence country. Therein lines half the reason for the issues, I suppose: they are so detached from the US and haven't even set foot there for a visit in a decade that I think they send in that return in 'robot' mode the same faulty way they always have, assuming they are doing their duty and then just continuing as normal. Locally, they are fully compliant with tax law.

They will indeed be (well) below the estate tax filing limit.

In the event of the advice above, should I just keep quiet and let them file in the same way as always this year, then? Better that than not filing at all this year?

(To be quite honest a lot of this might be hypothetical anyway as I doubt they would understand most of what I would even try to explain, and if they do understand, they might get in such a panic that I might inadvertently hurry up the estate becoming reality!)


----------



## Bevdeforges

Quite honestly, I think you'd just be putting yourself in harm's way to intervene in things at this point. Granted, your parents may be submitting "faulty" tax returns, however it's their financial situation and from everything you've said, it's highly unlikely they are going to be audited by the IRS from afar for a technical misunderstanding of the filing requirements.

If they have no US assets, and their estates fall well under the US threshold, then any technical filing errors or omissions are not going to cause any problems when they get to the inheritance stage - at least not from the US tax authorities. The IRS likes to make folks think they are omnipotent, but in fact, they have very little power outside the US in many matters. No point in upsetting your parents over what sounds like much ado about nothing.
Cheers,
Bev


----------



## diharv

As tempted as you are to open this can of worms , for your sake and the sake of your parents ,do not open it. Nothing good can come of it. Yeah stuff you read from the compliance industry sows seed of doubt and fear in your mind but that is precisely what it is designed to do. Listen to Maz 57 . I opened the can and it has cost me HUGE but thankfully I am almost at the point of forever logging out of the system.


----------



## Nononymous

Ditto the above. I would do absolutely nothing. In your parents situation, the IRS really can't touch them, and has no incentive to pursue them.


----------



## Jonathan12

I stupidly mentioned all this to my mother in passing, who had a minor panic and filed this year's taxes with a 50% income increase on last year just to try to pad things out. Didn't change anything else though. Argh. The total figure is still small (and well under the max amount on the foreign income exclusion, but percentage wise, it is chunky. Since the full figure is still well under the foreign income exclusion level, is it likely to all still be fine, or will the percentage increase ring alarm bells? I hope a can of worms hasn't been opened.


----------



## Bevdeforges

Despite all the anxiety that seems to be out there regarding US taxes, they don't really do all that much "investigation and analysis" of those of us taxpayers of modest means and income levels. If something really obvious leaps out from the return, your parents might get a letter from the IRS, asking for an explanation - but even those are pretty rare. (And any query will be by postal mail - there are zillions of schemes out there with spammy e-mail messages said to be from the IRS that should not even be opened.)

Let your parents file the way they understand the rules and the way that has worked for them for ages. If there are problems or questions, the IRS will be in touch. But if they hear nothing, that's probably the best news of all!
Cheers,
Bev


----------



## Jonathan12

That sounds okay. I didn't encourage them to change how they did it but I think my mom just freaked a bit and added loads extra, not necessarily to cover anything but just to try to pad it out. She's already sent off the taxes for the year, with the 50% increase.  But as I said, the total figure is still low compared to the foreign income max.

The letter would be terrifying given that it could open up the whole can of worms, but I am hoping that despite the large percentage increase (with them being retired, it might be more unexpected  ), the overall figure still being low will mean they won't care. Really hope it is ok!


----------



## Jonathan12

Only after reading another thread here did I realise the situation is even worse than I thought, in that given their ages obviously most income is from a local retirement, whose income they exclude as foreign income, and neither they, obviously, nor I until 5 minutes ago knew was not covered by the foreign exclusion. I won't be telling this as I've freaked them out enough (leading to the above couple posts), but with fatca just around the corner (they've not been asked anything yet and hope they never are...), I really hope that nothing comes of any of it, and certainly not that the IRS tries to take everything they have or come chasing me for it if taking everything they have wasn't enough or they don't pay up.

I guess if they don't pay fines/etc and inheritance is left for me, they'd come chasing me for at least the full inheritance to pay up?

I never thought of it from my own personal perspective, either - do I pretty much need to make sure I renounce my citizenship before I retire down the line, lest I wish to pay the IRS full taxes on my certainly meager retirement? Crazy, really. I feel like my whole family is an honest family, following the laws properly where we all live, but the IRS treats us all like criminals and money sources, purely based on that blue passport.


----------



## BBCWatcher

What on earth are you talking about, Jonathan?

First of all, is this potential inheritance you're talking about worth over US$5.43 million? Is it an inheritance you would be receiving from a dead person who renounced U.S. citizenship? If the answers to both questions are no, then the U.S. estate tax is zero, and there is no U.S. inheritance tax either. (Maybe Spain is more than zero?) So presumably you can set that issue aside completely.

Now, if you're expecting an inheritance of a certain size from somebody who isn't paying all taxes they legally owe -- _if_ that's even true -- then maybe those taxes (plus penalties and interest) will be collected _before_ you receive your inheritance. If you think that's a problem, then maybe you should recommend that your benefactors pay their taxes! But that's all you can do. It's their job to pay their taxes, not yours. If they ignore your advice, there's literally nothing you can do about it.

You could choose to worry about something you don't control, but I wouldn't recommend that.


----------



## Bevdeforges

OK - your parents are responsible for whatever they are filing for their US taxes. They certainly aren't the first (nor will they be the last) to have excluded their pension using the FEIE even though they really aren't supposed to do so.

If the pension is a government pension - i.e. one of those government mandated ones that are organized by the government through payroll withholdings - chances are it isn't taxable anyhow, thanks to the various tax treaties out there, and that's precisely why the IRS isn't too worried about their "error" on their tax forms.

Even FATCA isn't going to result in governments reporting all the details of your local financial life to the IRS. And even the Big Bad IRS doesn't bother people about "mistakes" they make on their returns that don't affect the amount they owe in taxes. 

Your parents have gotten along all this time without your help. And actually, unless they have funds or property in the US that you are looking to inherit, you really don't have to worry about US Inheritance taxes - or even interference in the Spanish inheritance process. Many US citizens, both in the US and outside, die every year and nothing at all is filed with the US - no "final" US tax return and certainly no inheritance tax return. Life goes on.
Cheers,
Bev


----------



## BBCWatcher

For reference, the U.S. and Spain have a tax treaty. Treaty articles 1, 20, and 21 are likely to be the most relevant to your parents.


----------



## Jonathan12

Thanks. It just is so stressful! I'm OK treaty wise here but in the country where my parents live, there is no tax treaty with the US. I guess that means that there would in fact be lots of tax owed, and penalties, on their pension. Hopefully everything will be fine as obviously if the IRS ever dig, there'd be other issues in terms of fbars etc. too. I dislike this whole situation. (And no the inheritance isn't big, I just figured that if they do dig and fine my parents, it'd eat the inheritance and I was worried the liability would go to me as previous gifts would have been in the inheritance had they not been gifted, that would have gone to pay these fines and taxes.)

Sorry if I'm seeming so paranoid, all this just has me so worried. Hopefully nothing will ever come of any of it and things will continue as always.


----------



## BBCWatcher

Jonathan12 said:


> I guess that means that there would in fact be lots of tax owed, and penalties, on their pension.


1. How much is this pension we're talking about, roughly?
2. How much other income do they have?
3. How much of that other income is earned income (from work)?
4. How much income tax do they pay, if any, on that pension?

Forgive me if I'm asking questions already answered upthread, but I can't remember everything upthread. 



> (And no the inheritance isn't big, I just figured that if they do dig and fine my parents, it'd eat the inheritance and I was worried the liability would go to me as previous gifts would have been in the inheritance had they not been gifted, that would have gone to pay these fines and taxes.)


Sure, it's _possible_ if they owe taxes (to anybody) the size of your potential inheritance will decrease. It's also possible -- much more likely, probably, unfortunately -- they could need expensive, unreimbursed medical care that'll wipe out their assets. It's possible one of your parents will go to the casino and gamble away all their savings, leaving you and their other heirs with nothing. What can you do? Never, never count on inheritances.(*) And may your parents live long, healthy, enjoyable lives, by the way.

(*) Yes, gifts are nice to receive. In _most_ cases gifts are yours to keep, but there are a very few exceptions around the world. In the U.S., for example, in many states Medicaid can try to grab back gifts. (Medicaid is the government program that pays for such things as nursing home care when nobody else can pay. Hence the government tries to recover whatever it can when it is stuck with the bills to care for effectively broke individuals.) As another example, if you receive a gift from the leader of Islamic State, chances are a lot of governments would want to seize that gift from you.


----------



## Bevdeforges

Unless there is some reason for the IRS to dig into your parents' situation (i.e. some evidence of an attempt to hide taxable income or something similar), they simply aren't going to bother. Even a pension from a country without a formal tax treaty is probably just going to be "assumed" to be exempt from taxation somehow. (Surely, some sharp tax attorney could find a way whether using tax credits or not.)

It's really not your problem. And if none of the inheritance is sitting in the US, it's highly unlikely the IRS is going to bother looking for or at it when the time comes.
Cheers,
Bev


----------

