How estate-tax rules apply when the donor hails from a foreign land
Q: My uncle passed away and left me a huge inheritance. Since he did not believe in trusts or wills, he put my name, along with his wife's, on his joint bank account and his real estate. He believed that when he passed on, his wife and I would inherit his estate. He and his wife are foreigners, but I am a resident. The value of his real estate investment has doubled in the past 10 years, while the mutual funds have dropped about 40 percent. Can you tell me what tax laws apply to my situation? Can the bank freeze the assets?
- K.S., via e-mail
A: You might face an estate tax, which is paid by the estate of the deceased on all assets prior to their distribution to beneficiaries. The federal government and most states levy these taxes depending upon the size of the estate and other determinations (One spouse can leave unlimited amounts to another and owe no estate tax.)
But the rules become more complicated when either or both of the spouses are not United States citizens, says Scott Farber, a certified financial planner with Woodstock Corp., in Boston. You'll first need to
confirm whether your uncle was a US "resident" for estate-tax purposes. If he was, then estate taxes will be assessed on all of his assets, including any that he owned outside the US. If he was not a US resident for estate-tax purposes, then Mr. Farber says the estate tax will be assessed only on his US assets.
Second, the marital deduction is restricted when the surviving spouse is not a US citizen unless the assets are left to the spouse inside a qualified domestic trust.
As for freezing assets, if there is a tax due, the IRS or relevant state tax department - not the bank - has authority to freeze assets. This could occur only if a tax liability was overdue.
Given the potential complexity of your situation, Farber thinks it makes sense to speak to an attorney who specializes in estate planning.