It’s fairly common for Texas residents to inherit money or property from a relative in another state or even another country. Although the windfall may be a blessing, dealing with potential tax implications and reporting obligations, not so much. If the inheritance is from another country, the reporting, taxation, and paperwork can be completed and working with an estate planning attorney familiar with the procedures for handling inheritances from non-Texas estates can ensure that you don’t run into any legal trouble nor pay more in taxes than you should.
The Internal Revenue Service (IRS) has specific reporting requirements for estates you inherit from a non-U.S. citizen. Four issues in particular could give you legal and taxation trouble if not handled correctly.
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Non-U.S. Estate Inheritance Reporting Requirements to the IRS
Even if your inheritance isn’t taxable (for example, there isn’t an inheritance tax in Texas), you will usually need to report it to the IRS.
Use IRS Form 3520, titled “Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts.” The purpose of this reporting is for the IRS to track new assets entered into the U.S. tax system so it is aware of potential income that may be generated from these assets. This form is an informational form, reporting new assets entering the U.S., and not necessarily a taxation obligation.
Failure to report foreign inheritances (those from countries other than the United States) using Form 3520 may result in serious penalties. Failure to report the inheritance within the time limit can lead to fines equal to 5% of the value of the unreported foreign inheritance for each month the form is late (up to 25% of the total inheritance).
Potential Estate Tax Liability For Foreign Inheritance
Texas doesn’t levy a state-level income tax, but you may still have to pay federal taxes on your inheritance.
If the deceased’s estate exceeds a certain threshold (which changes annually), the executor of the estate must file IRS Form 706. The value of the estate is adjusted to deduct and account for gift tax exemptions. If the deceased was a non-U.S. resident holding U.S.-situated assets, the estate administrator must file an estate tax return using IRS Form 706-NA if the value of the assets exceeds a certain threshold (this amount changes annually; in 2025, it was $60,000).
Income Tax Considerations
Inherited assets aren’t usually subject to income tax, but if you use the assets to generate income, then any income generated is subject to taxation. For example, if you use your inheritance to start a business, then any income you earn from the business would be subject to taxation. You may be able to convert your inheritance to a Roth account to minimize future income tax burdens on inherited assets.
Importance of Professional Advice
A qualified tax professional can help you understand how to properly report any inheritance you receive to the IRS, and provide complementary advice to that of your estate planning attorney.
Tax laws are complex and subject to change. The IRS changes the threshold amounts each year, so don’t rely on DIY internet forms, as they may be outdated, leaving you in hot water with the IRS.
If you know that you’ll soon be inheriting assets from someone in another state or another country, consulting with a tax professional or attorney can help you make plans in advance to preserve as much of your inheritance as possible while still complying with state and federal reporting requirements.
