USA Tax Treatment of Foreign-sibling Gift to U.S. Citizen and Resident

[jgarrett39]

The background: My mother passed away, in Toronto, Canada, in the Fall of 2019 leaving an estate that has still to be probated. The bulk of my mother's holdings, while living, was invested in a paid-off condo worth about $ One million CAN (thus, about $750K U.S.). Thus, while alive her net worth was about $CAN 1.2 million.

I recently learned that while still living, my mother transferred ownership of the condo to my sister (the executor). My sister has promised that upon selling the condo, she will distribute the proceeds to the three heirs equally. Assuming all proceeds as she promises, I should receive about $250K U.S. from this activity.

I am posting to ask what tax treatment the I.R.S. will impose on whatever I receive from my sister. Also, if receiving this money from my sister is taxable, I seek guidance as to how to minimize the resulting tax bite. For e.g., one thing that occurred to me is that if this is deemed to be a gift from a covered expatriate (which I hope she's not), tax may be minimized by having the amount transferred piecemeal over several years. My understanding is that in each tax year, only the amount in excess of the gift tax exclusion would be taxed.

I have summarized what I believe to be relevant information below. Please let me know if any additional information would be helpful.

My nationality status: Born in Canada. Canadian citizen, but not a Canadian resident. Naturalized U.S. citizen and U.S. resident.

My sister's nationality status: Born in Canada and Canadian citizen. She _was_ a U.S. Permanent resident between about 1980 and about 1991. She then moved back to Canada (Ontario) and has been a resident there ever since.

I am assuming that my mother's national status is no longer relevant, since any transfer of assets from the sale of the condo will come from my sister, and will not be part of the Ontario estate.

 

[Werner Reisacher]

Your mother's national status actually matters. If she was a US citizen, she was subject to US worldwide income taxation. If that was not disclosed, there would be a tax and possibly a FATCA (foreign bank account) issue. (for retroactive years during which income was earned)
During the probate period, the issue of the capital gains tax will come up and possibly deducted directly from the estate before the distribution of the funds to the beneficiary.
Once you become the owner of "funds" in a foreign bank account, you need to report it to the IRS. (see Fatca regulations) Irrespective of whether your sister is transferring it immediately or over an extended period. The total amount would be considered as "a reportable" possession of funds outside the US.
The tax-free gift and inheritance tax limit in the US is way over the $ 250 K limit.
You may want to consider using the Double Tax Agreement between the US and Canada on the capital gain on the inheritance payable in Canada. This requires however that the beneficiaries are clearly defined in the probation period. (capital gain in the US is lower than in Canada)

See my answer to your related question in the General Section

 

[jgarrett39]

Your mother's national status actually matters. If she was a US citizen, she was subject to US worldwide income taxation. If that was not disclosed, there would be a tax and possibly a FATCA (foreign bank account) issue. (for retroactive years during which income was earned)
During the probate period, the issue of the capital gains tax will come up and possibly deducted directly from the estate before the distribution of the funds to the beneficiary.

My mother was never a U.S. citizen, but was a long-term permanent resident, between 1980 and 1998.
You state taxes that were left unpaid during my mother's life could be taken from the estate. However, I was left with the impression that the transfer of the condo to my sister's ownership while my mother was still alive moved the condo outside the estate, and thus not subject to the probate process or to any estate taxes.

Once you become the owner of "funds" in a foreign bank account, you need to report it to the IRS. (see Fatca regulations) Irrespective of whether your sister is transferring it immediately or over an extended period. The total amount would be considered as "a reportable" possession of funds outside the US.

Interesting. I don't really see how I could be considered the owner of the funds. There is no legal or formal paperwork stating that I own the money or that my sister even owes me the money. To my knowledge, the only thing leading my sister to transfer the money to me is a sense of moral obligation based on the idea that each of the siblings should receive 1/3 of the condo value.

The tax-free gift and inheritance tax limit in the US is way over the $ 250 K limit.
You may want to consider using the Double Tax Agreement between the US and Canada on the capital gain on the inheritance payable in Canada. This requires however that the beneficiaries are clearly defined in the probation period. (capital gain in the US is lower than in Canada)

My concern regarding taxation on the $250K was not inheritance tax, which to my knowledge is paid by the donor not the recipient. Instead, my concerns was over the "expat tax" addressed by IRS Section 2801. This is a controversial section passed in 2008 as part of the HEART act, and covers gifts and bequests to U.S. citizens from former U.S. persons living abroad. It doesn't appear to have been implemented yet. And yet multiple law firms have client alerts and some preliminary guidance regarding abiding by the law.

In part, I was trying to find out whether anyone here knew whether my sister qualified as a "covered expat" in view of the nationality and residence data I provided in the top post. I find the applicable IRS statutory sections unclear. Moreover various sections keep referring to other sections for important definitions. Various law firms summaries of the law suggest that she would not be a covered expat, but I haven't been able to prove that to myself while reading the IRS sections themselves.

 

[Werner Reisacher]

1) Since your mother was never a US citizen nor a tax resident during recent years, this issue is mute.
2) Sorry, but I did not read carefully that all of the entire inheritance goes legally directly to your sister. In this case, all it changes is the fact that the funds will actually be transferred as a gift. In general, gifts from one Canadian to another are not taxable unless there is a "capital item" (real estate as an example) involved because of the valuation of that gift. Cross border gifts are tricky and you need to look into that.
3) Yes, the capital gain tax on the property is paid by the estate and since your sister received the funds directly, this issue is mute.
4) You said that your sister was born a Canadian citizen. Therefore, she cannot be a "covered ex-pat" since she was never a US citizen. This law was passed for American citizens that left the country and, despite their duty to pay taxes on their worldwide income in the US, never fulfilled their tax obligations since they left the country. You need to check with your sister whether she had fulfilled all her tax obligations with the IRS after having left the country. She would still not be fall under the law of the cover ex-pat but it could complicate the issue.
But once again, read the instructions under FATCA. (foreign bank accounts and transfer of foreign funds in excess of $ 10,000. Noncompliance with those rules are severe.

 

[Kat Maple]

Hi Werner

in your last sentence above "read the instructions under FATCA. (foreign bank accounts and transfer of foreign funds in excess of $ 10,000." I cannot find anything in FATCA rules about the transfer of foreign funds in excess of $10,000. Can you point out your source for this, please?

Thanks

Kat

 

[Werner Reisacher]

Sorry, Kat,
I should have been more precise in my definition of the reporting requirements of foreign financial assets owned by US citizens or residents.
Back in 1970, the FBAR (Foreign Bank Account Reporting) law was passed. It was a requirement for US taxpayers to report foreign bank accounts in excess of $ 10K to the US Treasury Department. In general, the law was only enforced in extreme fraudulent tax cases. And since Foreign Banks did not have a responsibility to report such bank accounts to the US Treasury, it was difficult to enforce the law.
Following the 9/11 tragedy, the US Patriot Act 2001 law was passed. Under this law, the US Treasury was allowed to enforce the law to be able to assist law enforcement to follow the money trail of foreign terrorists. The US Treasury in turn assigned the IRS to act as their "investigators" and the IRS, in turn, added reporting requirements to the US Taxpayers as part of annual Form 1040 reporting.
During the following years, the Treasury Department extended the reporting requirement under the FATCA (Foreign Account Tax Compliance) Law by imposing reporting requirements of funds owned by US Taxpayers denominated in US $ on a worldwide basis.
Today, FBAR is part of the FACTA law which includes both, the reporting requirement to both, the US Treasury and the IRS.
As of today, there are no reporting requirements for foreign-owned real estate properties, as long as such properties to not generate income. But the moment, the property is sold locally, the FACTA law applies.

Understand how to report foreign bank and financial accounts | Internal Revenue Service

FS-2019-7, April 2019 - In a global economy, many people in the United States have foreign financial accounts.

www.irs.gov

.

FBAR vs FATCA: What You Need to Know

Tax attorney Joseph R. Viola explains the differences between FBAR and FATCA filing requirements for U.S. taxpayers with foreign accounts and assets.

www.jrviola.com

 

[Kat Maple]

Hi Werner,

Thanks for acknowledging your error as it really helps clarify things. As you know it is vitally important that we give correct information to the posters.

Thanks again!

Kat