Inheriting US assets while living abroad: taxes & estate planning gaps

Receiving a US inheritance as an expat is not typically a taxable event in the United States. But it can be a reporting event, a state tax event, a foreign-country tax event, and an estate-planning gap, sometimes all at once.

Most people conflate two different concepts: the estate tax and the inheritance tax. The US levies a federal estate tax on the estate before assets are distributed, not on the heir who receives them. And the 2026 federal exemption is $15 million per person, which means the vast majority of American families, including most expats, will never trigger it. The estate your parents leave you at $3 million or $8 million almost certainly generates no federal estate tax, and you, as the heir, pay no US tax on what you receive.

But "not taxable" and "not reportable" are different things. The IRS wants to know about large cross-border asset transfers even when no tax is owed. And for expats with a foreign spouse, an unresolved domicile state, or heirs living in France or Japan, the gaps in an outdated estate plan can be expensive.

This guide covers what expat heirs actually owe and must report, which state and foreign-country taxes may apply, the non-citizen spouse problem most people don't discover until it's too late, and the estate-planning gaps worth reviewing now, before they matter.

The US has no federal inheritance tax, but that's not the whole story

The distinction matters because it changes who pays, when, and how much. A federal estate tax is levied on the decedent's estate before assets pass to heirs. A federal inheritance tax would be levied on the heirs themselves after they receive assets. The US imposes the former. It has never imposed the latter.

For 2026, the IRS has set the basic exclusion amount at $15,000,000 per person, up from $13,990,000 in 2025. The One Big Beautiful Bill Act, signed on July 4, 2025, permanently replaced the temporary exemption created by the Tax Cuts and Jobs Act. The $15 million figure is now the permanent baseline, adjusting upward for inflation each year starting in 2027. For married couples with proper planning, the combined exemption reaches $30 million.

The practical implication: an estate worth $2 million, $5 million, or even $10 million generates no federal estate tax, which means the heir receives assets without a federal tax bill attached. For most expat families, the federal estate tax is not the real exposure.

The "whole story" qualifier is that this federal picture doesn't account for reporting obligations, state estate and inheritance taxes, the country where you live, or the planning gaps in a will drafted before you moved abroad. Each of those deserves its own section.

• Taxes on American citizens living abroad
• US exit tax guide

What you actually owe as an expat heir

Federal income tax on the inheritance itself

No federal income tax applies to the receipt of an inheritance: cash, property, or investments, regardless of the amount. The heir does not report the inheritance as income on Form 1040. The inheritance itself is simply not income.

What does become taxable is what the inherited assets generate afterward. Interest from an inherited savings account goes on Schedule B. Dividends from inherited stock go on Schedule B.

Rental income from an inherited property goes on Schedule E. Capital gains when you eventually sell inherited assets go on Schedule D. The receipt is tax-free; the subsequent income is taxed normally.

Stepped-up basis: the most valuable benefit most expat heirs don't know about

Inherited property generally resets its cost basis to fair market value on the date of the deceased's death. This is the stepped-up basis, and it is one of the most significant tax benefits in the entire US tax code.

The practical impact: if your parent bought a house for $200,000 in 1990 and it's worth $900,000 at the time of death, your cost basis is $900,000, not $200,000. If you sell the property the following year for $920,000, you owe capital gains tax only on $20,000 of gain, not $700,000. The decades of appreciation during the deceased's lifetime are effectively erased from a capital gains perspective.

This applies to expat heirs the same as domestic heirs. But it requires documentation, appraisals for real property, broker statements showing portfolio values, bank account balances.

All of these should be assembled as of the date of death, not months later when memories and records are less accessible. Missing basis documentation is one of the most common ways inherited property generates unnecessary tax when eventually sold.

The stepped-up basis intersects directly with FIRPTA and capital gains planning when the inherited asset is US real estate. 

• Selling US real estate as an expat

Income from inherited assets, including the PFIC trap

Once inherited, all income from assets is taxable under normal rules. If inherited assets include foreign mutual funds, exchange-traded funds, or other foreign investment vehicles, PFIC (Passive Foreign Investment Company) rules apply: a complex and punitive regime that can produce unexpectedly high tax rates. 

• PFIC tax: what US expats need to know

If inherited foreign assets generate income that is also taxed in the country where you live, the Foreign Tax Credit may be available to reduce double taxation. 

• FEIE vs Foreign Tax Credit

The reporting obligations most expat heirs miss

This section is the most practically urgent for most readers, not because of tax, but because of compliance traps with disproportionate penalties.

Form 3520, when it's required and what happens if you miss it

Form 3520 is required if you receive more than $100,000 from a foreign person or foreign estate in a single tax year. It's an information return, not a tax bill, but the penalty for non-filing can reach 25% of the amount received. For a $300,000 inheritance, that's a $75,000 penalty for a form most people have never heard of.

Two points that regularly catch expat heirs off guard:

First, the reporting requirement is triggered by where the estate is administered, not by the deceased's citizenship. A US citizen parent who lived and died abroad may still trigger Form 3520 reporting if the estate is administered outside the US.

Second, the $100,000 threshold aggregates related sources. Sixty thousand dollars from your mother's estate and fifty thousand from your father's estate in the same tax year totals $110,000 above the threshold, triggering the requirement.

Form 3520 is due on the same date as your tax return April 15, with extensions to October 15. It is filed separately from your Form 1040. "I didn't know I had to file" is not a defence the IRS typically accepts without a reasonable-cause argument supported by documentation.

FBAR and Form 8938 if inherited assets include foreign accounts

If inherited assets include foreign financial accounts and aggregate balances exceed $10,000 at any point during the year, FBAR (FinCEN 114) is required. This is a Treasury reporting requirement separate from your IRS tax return.

Form 8938 (FATCA) applies if foreign financial assets exceed the applicable thresholds for expats living abroad, $200,000 at year-end or $300,000 at any point during the year.

Form 3520, FBAR, and Form 8938 can all apply simultaneously to the same inheritance. The day you inherit a foreign account, document the balance that establishes your date-of-inheritance basis and confirms whether reporting thresholds are crossed.

• FATCA for American expats

Form 706, the estate's return, not yours

The estate itself may need to file Form 706 (US Estate Tax Return) if the gross estate exceeds the filing threshold. This is due nine months after the date of death, with a six-month extension available.

You as the heir, don't file this: the executor does. But if the estate includes US real estate or other property subject to stepped-up basis reporting, confirming that Form 706 and Form 8971 were filed correctly matters when you eventually sell those assets and need to substantiate your basis.

State inheritance and estate taxes

State estate taxes at much lower thresholds

Twelve states plus DC impose their own estate taxes with exemptions far below the federal $15 million threshold. 

Examples: Massachusetts has a $2 million exemption, estates above that owe Massachusetts estate tax at rates up to 16%. Oregon's threshold is $1 million. Washington state's 2026 threshold is $3,076,000. 

State estate tax is determined by where the deceased was domiciled, not where the heir lives. If your parent was domiciled in Massachusetts at death, Massachusetts estate tax may apply to their estate regardless of whether you live in Spain or Singapore.

The "never formally left" trap deserves emphasis here. An expat who moved abroad but never changed domicile (still voting absentee in Massachusetts, still holding a Massachusetts driver's licence), may expose their entire worldwide estate to Massachusetts estate tax rates even after years of physical absence. Years of living abroad don't end domicile without deliberate legal steps.

State inheritance taxes on beneficiaries

Six states impose inheritance taxes paid by the heir rather than the estate: Maryland, Nebraska, Iowa, Kentucky, New Jersey, and Pennsylvania. These apply based on where the deceased was domiciled and the heir's relationship to them. 

Spouses are typically exempt; children often receive reduced rates or higher thresholds; more distant relatives and unrelated beneficiaries face higher rates. Living abroad doesn't exempt you — the tax follows the deceased's location.

The domicile connection to estate tax planning

An expat who formalizes domicile in Florida, Texas, Nevada, or South Dakota eliminates state estate tax exposure on their own estate entirely, as these states impose no estate or inheritance tax.

This is one of the highest-value, least-discussed reasons to formalize domicile before it's urgent.

• Declaration of Domicile in Florida
• How to select the state of domicile
• Best and worst domicile states for nomads and expats

If your spouse is a foreign national: the QDOT problem

This is the most common estate planning gap in the SavvyNomad ICP and the one most consistently missing from existing wills.

The unlimited marital deduction allows unlimited assets to pass between spouses at death with no federal estate tax, but only if the surviving spouse is a US citizen. If the surviving spouse is a non-citizen, the unlimited marital deduction does not apply automatically. Assets above the general exemption passing to a non-citizen spouse are subject to estate tax at the first spouse's death.

The rationale: the IRS is concerned that a non-citizen spouse could leave the US with inherited assets and remove them from its tax jurisdiction before estate tax is ever collected. The unlimited marital deduction defers estate tax until the second spouse dies, but only if the IRS can be confident it will still have jurisdiction at that point.

The solution is a Qualified Domestic Trust (QDOT), which allows assets to pass to a non-citizen spouse with estate tax deferred until distributions are made or the surviving spouse dies. The trustee must be a US citizen or US institution, and the trust must be specifically drafted to qualify.

Who this affects in practice: a US citizen expat living in Spain or Portugal, married to a Spanish or Portuguese spouse, whose current will leaves everything to their partner without a QDOT. Without the trust, assets above the $15 million exemption face estate tax at the first death — creating a tax bill that wouldn't exist if the surviving spouse were a US citizen.

For 2026, the annual gift tax exclusion for gifts to a non-citizen spouse is $194,000 significantly higher than the $19,000 standard annual exclusion, which provides a separate, ongoing tool for reducing estate size through lifetime giving to a foreign national spouse.

If you are married to a non-citizen and your current estate plan doesn't address this, it is the most urgent planning gap to close.

The foreign country tax on your inheritance

For most SavvyNomad readers, the real inheritance tax exposure isn't in the US. It's in the country where they live.

While most countries don't tax an inheritance simply because it originated abroad, they may tax the heir who is resident on what they receive. The US has no inheritance tax on heirs — but France, Spain, Japan, Germany, and many other popular expat destinations do. 

• France imposes inheritance tax at rates up to 45% for direct heirs (children), higher for more distant relatives. The progressive structure means larger inheritances face higher marginal rates.
• Spain is more complex, inheritance tax is administered at the autonomous community level. Madrid and the Basque Country offer significant reductions for direct family; Catalonia and Valencia are less favorable. Rates can exceed 34% on larger inheritances even for children.
• Japan is the most severe case for expats. Inheritance tax rates reach 55%; the tax is due within 10 months of death; and it applies to worldwide assets for anyone who has been a Japanese resident for more than 10 of the last 15 years. A $3 million US inheritance can trigger a six-figure Japanese inheritance tax bill payable within 10 months — before the US estate has completed probate or distributed a single dollar. This liquidity problem is among the most practically damaging consequences of cross-border inheritance planning. 
• Germany imposes an inheritance tax up to 30% for children above their exemptions, with spouse exemptions available but not unlimited.

The US has estate and gift tax treaties with a limited number of countries, including Australia, Canada, France, Germany, Ireland, Italy, the Netherlands, South Africa, Switzerland, and the UK, that may provide credits, exemptions, or pro-rata relief. Treaty benefits must be actively claimed and depend on the specific treaty language; many popular expat destinations have limited or no treaty relief. Verify current treaty status before relying on any treaty position.

The estate planning implication is significant: if your heirs live in France, Spain, or Japan, their inheritance tax exposure should be part of your estate plan now — not something they discover under time pressure after your death.

Estate planning gaps expats should review now

Outdated will executed in a former state

A will drafted before moving abroad may still be valid: wills don't automatically expire, but it almost certainly reflects a financial and legal reality that no longer exists. Assets acquired abroad, foreign bank accounts, foreign property, business interests in another country all may be entirely absent. The executor named may live in a former city and have no practical capacity for cross-border estate administration.

Domicile not formalized, exposing the estate to the wrong state

An expat who never formalized a domicile change may die legally domiciled in a high-tax state with a $1 million or $2 million estate tax exemption, exposing their worldwide estate to that state's rates on amounts the federal threshold entirely exempts. 

The fix is the same as for income tax: Declaration of Domicile, driver's license, voter registration, and consistent records all pointing to a no-estate-tax state. Domicile at death determines which state's estate tax applies, and it is one of the highest-value reasons to formalize domicile before it becomes urgent.

• Declaration of Domicile in Florida
• How to break state residency

No QDOT for a non-citizen spouse

Covered above, but flagged again here as an action item because it's the gap that most commonly goes unaddressed. If your current will leaves assets directly to a non-citizen spouse without a QDOT or equivalent structure, an estate planning attorney familiar with cross-border estates should review it.

Beneficiary designations pointing to outdated people or accounts

Retirement accounts, life insurance policies, and payable-on-death accounts pass by beneficiary designation, not by will. 

A will cannot override a beneficiary designation. An account designated to an ex-spouse, a deceased parent, or without a contingent beneficiary can create significant complications. These designations need independent review whenever circumstances change.

Foreign assets not coordinated with the US estate plan

A US will may not control assets located in foreign countries. Many jurisdictions require local wills, formal recognition of foreign wills through apostille or probate, or heirship certificates. 

Real estate in another country may be subject to that country's forced heirship rules, meaning local law dictates who inherits, regardless of what a US will says.

Frequently asked questions

Do I owe tax when I inherit from a US estate?

No federal income tax on the inheritance itself. The estate pays federal estate tax only if it exceeds $15 million (2026). You may owe state inheritance tax depending on where the deceased was domiciled. Your country of residence may impose its own inheritance tax separately.

What is Form 3520 and when do I need to file it?

An information return required when you receive more than $100,000 from a foreign person or foreign estate in one tax year. Not a tax bill, but penalties for non-filing can reach 25% of the amount received. File by April 15 with your tax return, separately from Form 1040. FATCA for American expats

Does my domicile state affect my estate's tax exposure?

Yes, state estate tax is determined by the deceased's domicile at death, not where heirs live. Formalising domicile in a no-estate-tax state (Florida, Texas, Nevada, South Dakota) eliminates state estate tax exposure on your own estate. Declaration of Domicile in Florida

What is the stepped-up basis and how does it affect me?

Inherited property resets to fair market value at the date of death. This eliminates capital gains tax on all appreciation during the deceased's lifetime. Document date-of-death values immediately: appraisals, broker statements, bank balances. Selling US real estate as an expat

What if I live in a country that taxes my inheritance?

You may owe inheritance tax in your country of residence: France, Spain, Japan, and Germany are common examples with significant rates. The US won't offset this in most cases. Check whether a US estate/gift tax treaty applies to your country of residence and consult a local tax professional familiar with cross-border estates.

My spouse is not a US citizen: is our estate plan at risk?

Potentially yes. The unlimited marital deduction doesn't apply to non-citizen spouses without a QDOT. Assets above the general exemption passing to a foreign national spouse at death face estate tax that a US citizen spouse wouldn't trigger. Get professional advice before assuming your current will handles this correctly.

I inherited a foreign bank account: what do I need to report?

FBAR (FinCEN 114) if aggregate foreign account balances exceed $10,000 at any point during the year; Form 8938 if foreign financial assets exceed FATCA thresholds ($200,000 year-end or $300,000 anytime for expats abroad); Form 3520 if total inherited from a foreign estate exceeds $100,000. These can all apply simultaneously.

Conclusion

The federal inheritance picture for most expats is straightforward: no federal inheritance tax, no federal income tax on what you receive, and a stepped-up basis that eliminates capital gains on prior appreciation. The federal exemption is high enough that the estate itself almost certainly owes nothing either.

The complications live elsewhere. In the reporting requirements that apply even when no tax is owed. In-state estate and inheritance taxes that apply based on the deceased's domicile, not yours.

In the country where you live, there may be taxes on what you receive, regardless of where it came from. And in estate plans that haven't been reviewed since the move abroad, with foreign spouses uncovered by QDOT provisions, outdated executors, and beneficiary designations that no longer reflect current circumstances.

Estate planning is one of the few financial tasks in which the cost of waiting until it matters is borne by the people you're trying to protect, not by you.

For personalized guidance on your specific situation, SavvyNomad's CPA-access service connects you with cross-border tax and estate professionals.