Declaring an Inheritance from Canada to the IRS

[sparksals]

I am a Legal Permanent US resident, Canadian citizen,
married to a US Citizen. I just received an inheritance
cheque in the mail for $25K Cdn funds. I know I don't have
to pay taxes on it, but I have to declare it to the IRS. I
have the letter from the lawyer as well as the page from the
will that left me this money to prove it's an inheritance.

How do I declare this inheritance to the IRS?
Is there a form I must file with our taxes?
Since the money is received in 2007, do I have to wait til
next tax season to declare the money?
Is this type of thing even part of taxes or do I just
somehow notify the IRS separately from taxes? If so, how?

I'm concerned that not notifying them until next year would
get me in some trouble and as a green card holder, I have to
keep my nose doubly clean.

 

[Herb Smith]

I am a Legal Permanent US resident, Canadian citizen,
married to a US Citizen. =A0I just received an inheritance
cheque in the mail for $25K Cdn funds. =A0I know I don't have
to pay taxes on it, but I have to declare it to the IRS. =A0I
have the letter from the lawyer as well as the page from the
will that left me this money to prove it's an inheritance.

How do I declare this inheritance to the IRS?

It's not taxable, so why would you have to report this
inheritance to the IRS? What lawyer advised you of this
"reporting requirement"?

 

[Shyster1040]

As a general matter, bequests received from the estate of a
foreign person do not have to be reported to the IRS unless
you received in 2007 US$100,000 or more in bequests or gifts
from foreign persons or foreign estates.

However, if the money was distributed out of a foreign trust
set up by the deceased foreign person, then you must report
receipt of the distribution to the IRS on Form 3520
regardless of the amount received.

The first question therefore is whether the inheritance was
distibuted from the estate of the person who left the money
to you, or was distributed from a trust set up by the person
who left the money to you.

If the money came directly from the estate (i.e., the check
is drawn on an account belonging to the estate, or an
account belonging to the administrator/executor that is used
to handle the estate's affairs), then you will not have to
report the receipt of the gift to the IRS.

On the other hand, if the distribution was from the assets
of a foreign trust that was set up by the deceased foreign
person, then you will have to report receipt of the amount
to the IRS on Form 3520. Form 3520 is due on the same date
as your Form 1040, with extensions, but is sent to a
different address; however, a copy of the Form 3520 must
also be included with your Form 1040.

With respect to the year in which such receipt must be
reported (assuming it was from a trust and not directly from
the estate), the issue depends on whether or not you had
so-called constructive receipt of that amount in 2006. If
you knew about the bequest in 2006 and the amount was set
aside or credited to you and was available for you to draw
on at your request in 2006, then you should report the
receipt of the bequest for 2006. However, since you actually
received the amount in 2007, you should attach to your 2007
Form 1040 a Form 8275, Disclosure Statement, briefly
explaining receipt of the gift, and that you reported it for
2006 as being constructively received in 2006.

Otherwise, if you received the money from a foreign trust,
the Form 3520 would be filed with the IRS by the due date of
your 2007 Form 1040 (i.e., 4/15/2008).

So, you need to answer the following:

1. Was the money distributed to you directly out of the
foreign estate, or was it distributed to you out of a
foreign trust?

If it came directly from the estate, then you most likely do
not have to report it. On the other hand, if it came from a
foreign trust, then you will have to report it.

2. If it came from a foreign trust, did you know about the
bequest in 2006 and was it set aside, credited to your name,
and made available for you to draw upon at your request?

If you knew about it in 2006 and could have requested in
2006 that part or all of the money be sent to you, then you
should most likely report it as being constructively
received in 2006.

Otherwise, if you did not know about it in 2006, or if you
could not have requested in 2006 that the money be sent to
you, then you would report it as actually received in 2007.

 

[cballard]

It's not taxable, so why would you have to report this
inheritance to the IRS? What lawyer advised you of this
"reporting requirement"?

Even though inheritances aren't taxable doesn't mean you
don't have to report them. A US taxpayer has to report all
foreign inheritances over $100,000 by filing Form 3520.

You can get a copy of the form here:
http://www.irs.gov/pub/irs-pdf/f3520.pdf

and a copy of the instructions here:
http://www.irs.gov/pub/irs-pdf/i3520.pdf

Failure to report an inheritance that exceeds this amount
could result in a penalty of up to 25% of the amount of the
inheritance.

As it is, the original poster is well below the filing
threshold, but don't assume that there is no reporting
requirement just because no tax is owed.

--Chris

 

[sparksals]

Thank you for that information. I don't believe it was from
an established trust. The cheque is from the trust account
of the lawyer handling the probate of the will, which I
assume is the normal method in which estate funds are
distributed after probate. The letter from the lawyer said
he was acting on behalf of the named executors. The word
"trustees" was not used. Does that count as a trust or
does that mean it was distributed from the estate?

The person died in 2006, I was notified by my mom that the
decedent left some money to myself and my sister, but I
didn't know how much. I knew I would receive this
inheritance sometime, but had no idea when. I knew the will
was still being probated and the funds issued when it was
completed. The money was neither available to me, nor could
I request it.

So, to clarify, does a distribution from an estate from the
trust account of the lawyer handling the probate count as a
trust? I"m inclined to think not as it didn't come from the
trust of the decedent, but the trust account of the lawyer.
Can anyone clear this up for me?

 

[parrisbraeside]

Thank you for that information. I don't believe it was from
an established trust. The cheque is from the trust account
of the lawyer handling the probate of the will, which I
assume is the normal method in which estate funds are
distributed after probate. The letter from the lawyer said
he was acting on behalf of the named executors. The word
"trustees" was not used. Does that count as a trust or
does that mean it was distributed from the estate?

The person died in 2006, I was notified by my mom that the
decedent left some money to myself and my sister, but I
didn't know how much. I knew I would receive this
inheritance sometime, but had no idea when. I knew the will
was still being probated and the funds issued when it was
completed. The money was neither available to me, nor could
I request it.

So, to clarify, does a distribution from an estate from the
trust account of the lawyer handling the probate count as a
trust? I"m inclined to think not as it didn't come from the
trust of the decedent, but the trust account of the lawyer.
Can anyone clear this up for me?

For a decedent in Canada, there is automatically a trust
created on death called a testamentary trust. This is the
trust of the decedent.

(I've had to prepare two of these in the last week.)

Tim

 

[sparksals]

I'm even more confused now. I realize that a trust account
is established to handle the decedent's funds. But is that
the type of trust to which shyster referred? My
understanding is he meant a trust established prior to
death.

 

[parrisbraeside]

I'm even more confused now. I realize that a trust account
is established to handle the decedent's funds. But is that
the type of trust to which shyster referred? My
understanding is he meant a trust established prior to
death.

I believe that shyster may be better to answer than I. All I
can deal with here is the Canadian rules for the estate.

For Canadian law, the estate is deemed to have been set up
prior to death through the will. American law may be
different. (And from what I have seen, are generally
different.

I am a Canadian Tax Practitioner who deals with American
taxes but I don't deal with American decedents. That is a
stage beyond my knowledge so don't touch that work. Canadian
decedents I do know so handle that work.

However, as a means to make things easy, what is the
workload with reporting the trust? If the work isn't large
and the consequences of reporting is not bad while the
consequences of not reporting is bad, would it be easier to
report and let the government worker make the determination
be easier for you? Your choice of course and I can't really
give a lot of advise on the US situation - only the Canadian
half.

 

[sparksals]

I agree that it is better to err on the side of caution.
It's not taxable anyway, so that's the most important thing.

 

[cballard]

I agree that it is better to err on the side of caution.
It's not taxable anyway, so that's the most important thing.

Be careful here. if you report it as a foreign trust
distribution rather than as a foreign inheritance, there are
a whole new set of rules that apply and you can no longer
make the blanket statement that "it's not taxable".
Distributions from foreign trusts trigger income tax
liability to the beneficiary to the extent that the trust
had income. If the foreign trust has been around for more
than one year, you could be hit not only with income tax but
also with an additional interest charge on the tax. Take a
look at Schedules A, B, and C under Part III or Form 3520 to
see the foreign trust distribution tax and interest
calculations.

This is one of the most confusing and most punative
provisions in the US tax code. It's probably not an issue
in this particular case, but it is possible for the amount
of tax and interest payable from a foreign trust
distribution to actually exceed the amount of the
distribution.

--Chris