Is a Form 3520 required for a US citizen living in the UK who inherits $200,000 from their mother’s estate, given that the mother, a US citizen, resided in the UK at the time of her death?

When it comes to understanding your tax obligations as a US citizen inheriting from a foreign estate, clarity is essential. Let’s break down the topic in simple terms, elucidating it with examples.

• Scenario:
  Imagine a US citizen, living in the UK, inherits $200,000 from their mother’s estate. The catch? Their mother, also a US citizen, lived in the UK at the time of her passing. Does the inheritance require any reporting in the US?
• What Makes an Estate “Foreign”?
  For an estate to be considered foreign from a US tax perspective, its control and management should predominantly be outside the US. In our example, the estate is in the UK, with its assets and executors there, and governed by English law. All these factors point towards it being a foreign estate.
  Example: Consider Tom, a US citizen residing in France. When he inherits money from an estate managed entirely in France, under French law, even if the decedent was a US citizen, it’s treated as a foreign estate for US tax purposes.
• Reporting Obligations for US Citizens:
  A US citizen who receives over $100,000 from a foreign estate must report it on Form 3520 in the year of receipt. In our initial scenario, the inheritance amount is $200,000, so reporting on Form 3520 is mandatory.
  Example: If Sarah, a US citizen living in Italy, inherits $110,000 from an estate managed in Italy, she must report this on Form 3520 for that tax year.
• Rev. Rul. 81-112, 1981-1 C.B. 598:
  This ruling helps in determining whether an estate of a US citizen, who was a resident of a foreign country at their time of death, is considered a foreign estate for tax purposes. Essentially, even if the deceased was a US citizen, other factors like the location of the estate’s assets, the residence of the beneficiaries, and the laws governing the estate play a crucial role.
• Form 8938 and Foreign Estates:
  Not to be overlooked, an “interest in a foreign estate” may also be reportable on Form 8938. This form provides more details on the valuation and other specifics related to foreign financial assets.
  For more details, you can review the IRS’s guidelines on Form 8938 here

Conclusion:

Tax laws, especially those concerning international matters, may appear complicated. However, understanding your obligations, as seen in the scenarios above, is paramount to ensure you remain compliant. Remember, it’s always a good idea to seek professional guidance in such matters.