Estate Beneficiary & Form 8938: Inherited Foreign Accounts

Estate Beneficiary & Form 8938

Estate Beneficiary & Form 8938

Form 8938 Estate Beneficiary: When a beneficiary of an estate inherits foreign accounts and assets, they may (sometimes for the first time) have an IRS international information reporting requirement. One of the main forms that the person may have to file is the form 8938. The Form 8938 was introduced in accordance with FATCA — which is the Foreign Account Tax Compliance Act. While it can be an overwhelming and scary experience for a US Person taxpayer to have to begin reporting “offshore” accounts and assets  — oftentimes it is not that big a deal.

Estate Beneficiary Inheriting Foreign Assets

Let’s take a quick look at a common example we see often and how the state beneficiary can safely get into compliance:

Monroe is a US person and is a beneficiary of his uncle’s estate.

When Monroe’s uncle passed away, he left Monroe both a bank account in Spain and an investment account in Spain each worth about $500,000.

He also left Monroe a piece of land which has been in the family for many years — but it does not generate any income.

What are the (basic) reporting requirements?

Bank Account & Form 8938 for Estate Beneficiaries

Since Monroe is now the owner of the foreign bank account, he will have three main requirements in reporting the account.

He will have to disclose it each year on the annual FBAR (Foreign Bank and Financial Account Form FinCEN 114). He will also have to report the account an IRS form 8938 in accordance with FATCA (Foreign Account Tax Compliance Act).

In addition, Monroe will have to complete Schedule B to report that he has an ownership interest in a foreign account and is required to file the FBAR. 

When the bank issues interest income, he will have to report that income (and any corresponding foreign tax credits) on schedule B as well.

Do Estate Beneficiaries Report Investment Accounts on Form 8938?

Yes, and the investment account is more complicated.

Monroe will still have to report the account on the FBAR and presumably form 8938  (as well as schedule B). But, since the account has both stock and funds, there may be a much more complicated issue lurking beneath the surface in the form of a PFIC.

PFIC refers to Passive Foreign Investment Companies, and depending on whether there are distributions and/or if so if they are excess distributions may complicate the reporting significantly.

Monroe may have to file an IRS Form 8621 to both report the mutual funds, as well as perform the excess distribution calculation if the income distributions from the funds (if there any distributions out of the fund) amounted to ‘excess distributions.’

What about the Inherited Land?

The land is not an asset that is reported on either the FBAR or Form 8938.

If Monroe does sell the land at a future date, he will perform a capital gain calculation using the date he received the property — with the step-up fair market value on the DOD (Date of Death)  — and subtract that from the sale price.

He will presumably use the spot rates if applicable for the two specific dates (acquisition and sale).

What if the Estate Beneficiary Fails to Report Inherited Foreign Accounts?

If Monroe fails to get into compliance he may be subject to significant offshore fines and penalties for failing to comply with IRS international information reporting requirements  — but those penalties may be reduced, avoided or eliminated by using one of the offshore amnesty programs.

In conclusion, when a beneficiary of an estate inherits accounts or other assets that are located overseas they may be subject to the IRS international information reporting requirements, including FBAR and Form 8938. The IRS strictly enforces these offshore reporting requirements — and penalties are routinely issues — but they may be avoided or eliminated using one of the offshore amnesty programs.

Golding & Golding: About Our Tax Law Firm

Golding & Golding specializes exclusively in international tax, and specifically IRS disclosure & compliance.

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