The suggestion, by Badger and Nononymous, for this new thread came from a comment by Elizabeth, which I’ve excerpted here and can be found in its entirety at this link followed by several comments in reply.
Please share your information and experience regarding estate matters for former US citizens both in reply to Elizabeth’s question and/or in a broader sense, and ask your own questions about these matters on this thread.
Elizabeth wrote: . . . My father, who was born in the USA and moved to Canada in [the 1980s], passed away recently. A little background… after moving here he was under the impression that he didn’t need to file taxes in the US if he properly filed in Canada . . . He relinquished his US citizenship in [the 1990s] by taking the citizenship oath in Canada, along with the rest of our family. He never lived as an American after that, never renewed his US passport, never lived there. He did collect Social Security from the years he did work there, but that was it. His accountants want me to file US taxes for his estate, but I don’t think I need to as he was not a US citizen anymore.
“Its not fair to ambush an executor.”
Unfortunately the IRS sees fit to execute the executor.
The IRS executes everything except the law, except for a few exceptions where the law is on their side, and unfortunately this is one.
@Norman
“The IRS executes everything except the law…” Hey, I like that!
Without some leverage like US assets or US heirs, the IRS would have a tough time touching a non-US executor, especially if they don’t even know an estate is being settled. That’s why its best not to tell them anything they don’t already know.
But I get your point…as I mentioned previously, being an executor is a thankless job.
@maz57
I appreciate your sober assessment of Elizabeth’s situation, and your plans for choosing an executor.
@elizabeth
Be wary of “the call of the condor”, where their motto is “CYCA”, Cover Your Condor A$$.
I wonder how many like you haven’t been as fortunate and fallen prey when only wanting to do the “right thing”…
Yes, and speaking from experience, being an executor (or trix) is a thankless job. Hard enough dealing with the CRA, who routinely audit during this very difficult time.
My view in such situations is to take the adversarial approach. Start with the position that the IRS is a foreign enemy.
In the past, when have people paid tribute to a foreign enemy? When the foreign army was besieging the city. The people inside the city would collect their gold and silver and pay off the enemy who would go home laughing, because they knew that they would return yet again to besiege the city and strip it of even more of its wealth.
Has the IRS besieged this estate? Is it suing for its portion?
So the principle is this: Do not pay the foreign enemy until an actual threat presents itself.
And what could that threat be? Nothing
Remember Flaherty’s announcement (which is actual enshrined in the Canada US Tax Convention)? The CRA will not collect taxes for the IRS from a US citizen who was a Canadian while the US tax liability was incurred.
Short of the USA annexing Canada (and I don’t think that the present president has any plans to do this), nothing is going to happen.
The lawyers who said file back taxes, are quite frankly, committing a form of malpractice. They prove the axiom, “A little knowledge is a dangerous thing.”
This is indeed a fascinating subject I had never considered. I would not dream of telling the IRS anything if assets are outside the US. I understand things are different in Canda compared to various European countries.
Is there anything in Canadian law that tells the executor of a will that s/he must take into account the laws of another country? Is there always an executor? I cannot see this happening where I live, meaning that when you die in Belgium there is plenty of legal stuff to be sorted out, and lots to pay, but I’m pretty sure they (the government and Notaire taking care of the inheritance) wouldn’t care if you were a US Person or not. Maybe I’m wrong.
@fredB
The problem comes if you have US person heirs who if complient will have to fill a gift and estate tax irs form 3520. If they don’t and a large amount of money arrives in their account whether in the US or abroad (think fbars), that large deposit may ring bells and be questioned and a form crime charged.
I think there’s a limit to what can be done to provide posthumous protection to beneficiaries against mistreatment by the US. Make sure they understand the downside of US citizenship and what could happen to their inheritance, and let them take it from there. The threat to their inheritance is an excellent example of the brutality of the US government. It should make them think very carefully indeed before taking the risk.
Fred(B) – “when you die in Belgium there is plenty of legal stuff to be sorted out, and lots to pay, but I’m pretty sure they (the government and Notaire taking care of the inheritance) wouldn’t care if you were a US Person or not. Maybe I’m wrong.”
There’s often a legal requirement for payment of “all due taxes”. That can mean that the estate can’t legally be released for distribution to beneficiaries until it can be determined what taxes are “due”, and payment is made.
You might want to search on “Brussels IV” to find information about the EU’s new law on succession, inheritance, etc. I understand it lets you choose the nationality you want to apply when your will is executed. I don’t know if it applies where tax is concerned, but maybe worth having a look.
@plaxy
Yes, you make an excellent point, the EU will give you a choice of inheritance tax law, ie where you are resident or your citizenship. This is important as in places such as France and Switzerland when one partner dies your kids will inherit 50% of the estate along with spouse. This could be a problem if you have American children. We already have that sorted!
A interesting post! I have been pondering my situation. I am executor of a will for for my mother and my step – father. Both are dual citizens with NO interest in renouncing. Both are compliant. I know that I will need to do a final return for them. I am worried about the whole inheritance thing. Two step siblings in the US will inherit and a sibling in Canada. The sibling in Canada is NOT compliant, nor a Canadian citizen. I am worried about what I will have to report. As anyone else dealt with this?
@Petros, @Fred(B)
I think it’s fairly clear that, as with individual taxpayers, the IRS has little or no means to find or tax unreported estates outside the US. The danger isn’t the IRS, however. The danger is lawyers and accountants who believe, and convince clients, that the the estates of deceased US persons must be brought into US tax compliance.
In Elizabeth’s case she has the counter-argument of successful relinquishment, though even then the suits want a piece of paper to cover their collective asses. It might be more challenging to fight back if the deceased were an accidental who remained non-compliant but never renounced.
There’s an additional wrinkle, which came up the last time we discussed the issue. I believe that the executor is personally liable for any obligations of the estate (my language is probably not correct here – I’m not an expert on this stuff, though I probably will need to be one day). So if an executor discovers that the deceased is a US person, and decides that they don’t want to risk their own ability to travel or do business in the US for the sake of someone else’s money, then they may seek to bring the estate into US tax compliance, at great expense.
And finally it’s a different problem when any beneficiaries are either tax-compliant US persons or US residents. (Non-compliant US persons would also ignore the IRS, of course.) This is something I will be increasingly concerned about in the years to come. If there’s any risk of my daughter moving to the US and I decided to renounce, I would file “appropriate” (i.e. somewhat fictional to ensure zero owed) exit tax paperwork to avoid covered expatriate status.
@Ann#1
Your sibling living in Canada should get Canadian citizenship, pronto. Otherwise I could foresee potential problems.
As you may know, one of the very few classes of people vulnerable to having penalties collected on behalf of the IRS are US citizens living in Canada without Canadian citizenship (see the Dewees case).
Then again I know very little about how estates work, and am possibly being overly cautious. I the final return for the estate does not list beneficiaries, the non-compliant sibling possibly remains off the radar.
Each of the parents has a 5.25 million US exemption. Beyond that I know very little.
Re: The IRS requirement for US citizen beneficiaries to file a Form 3520. (In effect, any US tax compliant individual, wherever they might live.)
Now that’s another wrinkle I was not aware of. When I first read Heidi’s post above I thought that that couldn’t possibly be right because all the of taxes will have already been paid by the estate before any distribution to beneficiaries. A quick Google search indicates that it appears, in fact, to be the case. The 3520 requirement appears to be merely an explanation of where the money came from but doesn’t create a tax liability for the beneficiary.
Exactly what detail about the estate and the deceased is conveyed to the IRS on that form is something I am going to have to look into. Whether or not the IRS could possibly connect the dots and realize that a recently deceased person was the same person who was a US taxpayer 50 years ago is an interesting question. Sound like another scenario where spending the $2350 for a CLN might actually be a good investment.
I suspect that the IRS systems are so archaic they wouldn’t figure it out but but who wants to take that risk? And what about a deceased who has a CLN but never filed the exit tax Form 8854 and is therefore a covered expatriate? If they figured that out the beneficiary would have a tax liability (to the tune of about 40%). Hmmmm….
@maz57
Exactly, there should be no additional tax liability for US inheritors if the estate is under 5.25million, (after your resident county take their share) UNLESS the benefactor is a covered expat. Then a 40% tax is applied to the remainder.. The promised form 708 that asks this question has not yet been published.
Note that if democrats get elected the 5.25 million exemption may be much reduced. I believe Obama was trying to introduce a $500,000 limit.
maz57: “…what about a deceased who has a CLN but never filed the exit tax Form 8854 and is therefore a covered expatriate? ”
Not filing 8854 doesn’t make the person a covered expatriate. There’s a $10,000 fine for “failing to ‘timely’ file 8854”, but the deceased person wouldn’t retroactively be turned into a covered expatriate.
@maz57
Some reading
https://hodgen.com/death-and-taxes-and-expatriation/
@plaxy
I believe not filing 8854 does make you a covered expat according to Hodgen
Heidi –
https://hodgen.com/filing-late-form-8854-covered-expatriate
@plaxy
https://hodgen.com/chapter-4-are-you-a-covered-expatriate/
@plaxy
Late or not filing at all?
@plaxy
Hodgen seems to talk with forked tongue.
There’s no need for “not filing at all” ever to happen. The executor can file the 8854 if necessary though I don’t see why it would be necessary. All concerned should be satisfied with the CLN. The deceased is not a US citizen and owes no US taxes.
No need to rely on Hodgen, it says on the form that the penalty for late filing is $10000.
Plaxy
Hodgen seems to have changed his tune between 2013 and 2017.
How can an executor possibly know the worth of an estate of a renunciant /relinquisher as it existed the day before the benefactors renunciation which could be many years ago?
The 8854 is needed to check out of the US tax system.
I think we are talking at cross purposes. This is concerning a US person who inherits from a so called covered expat. The US inheritors will have to file the 3520 gift as estate tax form and pay the 40% if the benefactor was deemed covered.
This would be after the distribution by the executors.