Today we will explore the fictional case of John and Sue Ling to demonstrate some of the factors affecting international estate planning. John and Sue came to the United States from Taiwan 30 years ago when John was hired as an engineering professor at a local university. John recently became a U.S. citizen, but Sue has not yet taken that step. As a green card holder, she has permanent resident status and has been filing U.S. resident income tax returns with her husband since they arrived in the United States. She loves her life in the United States but if John dies first, she would most likely return to Taiwan to be with extended family. Having U.S. citizenship would complicate matters if she ended up moving back to Taiwan.

John has amassed a sizable retirement plan through his work at the university and this year he inherited money from his mother in Taiwan. John and Sue have no children and plan on leaving the bulk of their assets first to each other, and then to nieces and nephews still residing in Taiwan.

The size of the inheritance John received from his mother’s estate was unexpected, prompting John and Sue to start thinking about their own estate issues. John and Sue decide to meet with their CPA and are surprised to learn that there are key differences in U.S. estate and gift tax laws when one spouse is a noncitizen. They always assumed that since they were both U.S. residents, the usual U.S. estate tax rules would apply.

John is also informed by his CPA that he will need to file a 2018 Form 3520 to report the inheritance he received from his mother’s estate. This is an informational return only and has no tax implications, but it is a required disclosure and there are penalties for not filing. The form is not due until 2019, so John’s CPA makes a note in their file to make sure it is not overlooked come next year’s filing season. Of more immediate concern is that John and Sue’s 2017 joint return must include Form 8938 to disclose the inheritance that was pending in 2017 since John learned of the inheritance by the end of the year. An interest in a foreign estate is considered a “specified foreign financial asset” and must be disclosed. Luckily, John and Sue’s returns are on extension, so the CPA can just include that form when she prepares their returns.

The CPA also asks if John was an executor of his mother’s estate as that could lead to other reporting requirements if he had signature authority over the estate accounts. (See our January blog post “FinCen 114 and Form 8938: What They Are and When to File” for more information.) John assures his CPA that his sister was the executor and his only involvement was the receipt of his share of the estate.

Next week we will discuss the estate planning issues facing John and Sue because Sue is not a U.S. citizen and see what steps they can take to mitigate the consequences.

By Linda Bruckner, CPA