Estate Tax and Foreign Reporting: What You Should Know

The Current State of the Federal Estate Tax

Last year, the One Big Beautiful Bill Act significantly reduced the number of Americans affected by the federal gift and estate tax. At present, estates must exceed $15 million before the federal estate tax becomes a concern. Both spouses receive this exemption, or $30 million combined for married couples.  

Because spouses do not usually die at the same time and may remarry, we will keep the discussion at the individual level. The $15 million exemption also increases overtime with inflation.   

There is also an annual exclusion. In 2026, the annual exclusion is $19,000. This amount also rises with inflation. Gifts below this threshold do not require filing Form 709, the gift tax return.  

A separate concept is the "unified credit," meaning the lifetime exemption applies to both gift and estate tax. For example, Martha gives her son Snoop a house worth $5 million and also gives him $19,000. She files Form 709 and uses $5 million of her exemption. The $19,000 gift is ignored. If she later dies with a $20 million estate, $10 million would remain subject to federal estate tax, resulting in roughly $4 million of tax (at a 40% rate).  

The federal estate tax is heavily dependent on the political environment. Over the past two and a half decades, the exemption has generally increased significantly. Congress has also considered proposals that could lower the exemption and increase the rate.

Regardless of the exemption amount or applicable tax rate, our office can help clients mitigate or eliminate potential estate tax exposure.  

‍Inherited Foreign Assets? Here's What You Need to Know

It is common for California estate planning clients to own assets overseas. For example, Zeus, who lives in Newport Beach, inherited a beachside estate in Greece from his father, Kronos, who died five years ago. Zeus also holds twenty bank accounts from his father, totaling more than $20 million. He brought the funds from Greece into the United States and used them to purchase mountain real estate and a lighting business.  

What Zeus does not realize is that he must report all of these accounts. 

It is normal for a California estate planning client to come in with assets scattered across the globe. Newport Beach, in particular, is home to many individuals with internationally held assets. While the inheritance itself maybe a blessing, the U.S. reporting obligations that come with it are where otherwise sophisticated people can run into trouble.

Do You Owe Estate Tax on a Foreign Inheritance?

Zeus lives in Newport Beach. Five years ago, his father, Kronos, who is a lifelong resident of Greece, passed away, leaving Zeus a beachside estate on the Aegean. Zeus also inherited twenty bank accounts from his father, holding more than $20 million in the aggregate. Zeus also received another $20 million brokerage account, which he brought into the United States and used to purchase mountain real estate and launch a lighting business. 

Zeus is wealthy and need not worry about federal estate tax, since Kronos had no U.S. connection. Zeus does, however, have significant reporting obligations.  

There are three reporting regimes: one is a one-time filing, and two recur annually. Let us walk through them. 

When Must You File Form 3520?

Kronos was a nonresident alien; his estate is a "foreign estate." Zeus must report the inheritance on Form 3520. A U.S. person who receives more than $100,000 in bequests from the estate of a nonresident alien during a tax year must file. Zeus qualifies.  

This is not taxable income—no estate tax applies. The federal government simply wants to track the source of the funds. Because Kronos was not a U.S. citizen, Zeus has this reporting duty.  

‍What Happens If You File Late?

Say Zeus never filed the Form 3520—not a form most people think of after losing a parent overseas. He is late, and penalties may apply. If the failure was not willful, penalty abatement may be available.     

When Is an FBAR Required?

Zeus has an annual FBAR obligation (FinCEN Form 114). A U.S. person must file if the aggregate value of foreign financial accounts exceeds $10,000 at any point in the year. Twenty accounts holding $20 million easily clear that threshold. Zeus owed an FBAR for every year he held those accounts—a multi-year backlog on top of the Form 3520 delinquency. Penalties follow, addressed below.  

When Must You File Form 8938?

Zeus is not done. Form 8938 is filed with the income tax return and overlaps with the FBAR, but covers a broader set of assets with higher, status-dependent thresholds. A single U.S. resident must file when specified foreign financial assets exceed $50,000 at year-end (or $75,000 at any time). For a married couple filing jointly, the thresholds are $100,000 and $150,000. Zeus clears all of these.  

The same real-property nuance applies: directly held foreign real estate is generally not a "specified foreign financial asset," so the villa stays off Form 8938 as well— unless Zeus holds it through a foreign entity, which changes everything.

Zeus has property in Greece. That is not a financial account and does not need to be reported on FBAR or FATCA, unless he owns it through a foreign entity. When Zeus dies, his son Ares may have a separate filing obligation if the estate meets the threshold for Form 706, the estate tax return. If Zeus instead gifts his property in Greece to Eileithyia, he would need to file Form 709, the gift tax return.  

How Foreign Entities Affect U.S. Reporting

Zeus brought money into the United States and bought domestic real estate and a domestic business. These are U.S. assets and are treated accordingly. But U.S. assets can be held through a non-U.S. entity. If Zeus bought them through a Cook Islands LLC — say, Post-Titan LLC — different rules may apply, and additional forms may be required.

Penalties for Failing to Report Foreign Assets

Penalties are a major enforcement tool — and, as it happens, a revenue source that does not require raising tax rates. Everything turns on one question: was the failure “willful”?

The IRS once argued that 20 accounts meant 20 separate penalties. The Supreme Court disagreed: the penalty is per report, not per account, capped at an inflation-adjusted $16,536 per year (2026). Miss five years, pay five penalties.  

If the IRS finds Zeus was “willful,” the exposure is confiscatory. The penalty is the greater of about $165,353 (2026) or 50% of the account balance—per account, per year. Zeus could also face criminal liability.  

Many people who don’t report foreign accounts simply do not know the requirement exists. Ignorance can reduce some penalties—but not all. Willful blindness is enough. If Zeus’s CPA, Hermes, told him he should disclose his foreign holdings, but Zeus ignored the advice, that’s a willfulness problem.

Can IRS Penalties Be Reduced?

For Form 3520, the penalty for failing to report a large inheritance or foreign transaction runs up to 25% of the unreported amount. In October 2024, the IRS announced it would stop automatically assessing these penalties and would consider reasonable cause first.  

Form 8938 carries its own $10,000 failure-to-file penalty, plus continuation penalties and a 40% accuracy-related penalty on any related underpayment. 

The facts could be far worse. Penalties are central to how the IRS does business, and Zeus has walked into several traps.    

Zeus is not immune from massive penalties. Knowing his reporting obligations is how he protects his wealth.  

Why Early Legal Advice Matters

Estate planning today involves more than just understanding federal estate and gift tax exemptions. While the current exemption levels mean fewer estates are subject to federal estate tax, significant planning issues still arise in how assets are structured, transferred, and reported.

For many individuals, the greater risk is not estate tax itself, but the complex reporting obligations that can arise when assets are held, inherited, or transferred across borders.

Whether planning for a future estate or dealing with an unexpected inheritance, early legal guidance can help identify tax and reporting obligations, preserve available planning options, and reduce the risk of costly penalties. Our Trusts, Estates & Asset Protection attorneys advise clients on estate planning, international reporting obligations, and wealth preservation strategies tailored to their individual circumstances.