Is there a tax on gifts received from foreign nationals?
What you should know about reporting rules and gift taxes from foreign nationals
High net-worth individuals from countries around the world often have one or more relatives who live in the US because it is often seen as a relatively stable and safe place for family members and their assets. However, there are a number of important tax and reporting implications to consider when foreign nationals gift (or transfer) assets to children or relatives who live in the US, and planning is needed to minimize potential tax losses connected to foreign gifts. This article focuses on two categories of gifts that can come from foreign-based nationals:
Gifts of assets that come from abroad
Gifts of US-based assets made by a foreign person or entity
This article provides an overview of things to consider, but keep in mind that asset transfer and estate planning for high-wealth multinationals is an inherently complex topic. You should be prepared to seek appropriate legal and tax advice for your specific situation, and the jurisdictions in which you have assets.
1. General rules for gifts that come from abroad
As a rule, when a US citizen or resident receives foreign gifts – money, real estate, or other assets from foreign individuals or entities – the person receiving the gift must adhere to specific reporting rules if the value exceeds certain thresholds. However, the United States has no foreign gift tax1, and the gift does not count as taxable income, so no taxes are typically due. (However, if the asset gifted generates income (such as from an inherited rental property), that will likely be counted as taxable.)2
Different reporting rules depending on who gave the gift
The IRS requires reporting via Form 3520 for gifts received from foreign entities, with the general exception of qualified tuition and medical payments.2 For other types of gifts, the threshold for reporting varies depending on whether the gift came from an individual or a business:3
For gifts from a foreign individual (or their estate), you are required to report only if the aggregate amount exceeds $100,000 during the taxable year. And in such cases, you must separately identify each gift over $5,000.
For gifts from a foreign corporation or partnership, you are required to report if the aggregate amount received from all such foreign gifts exceeded $19,570 for 2024 (the number is adjusted annually for inflation). You also have to identify each gift and donor separately. It's important to note that any sums reported are likely to be scrutinized: the IRS specifically refers to them as "purported" gifts and states that they "may recharacterize purported gifts from foreign corporations or foreign partnerships” – presumably as taxable income.
Failure to adhere to reporting requirements can be costly
The official purpose of the form is not for taxation but for reporting purposes and to ensure compliance with IRS regulations. But while a foreign gift is usually not taxable, failure to report that gift can be almost as costly: The IRS may impose penalties equal to five percent of the gift's value per month, not exceeding 25 percent of the gift.4 However, in some cases penalties may be waived if reasonable cause is shown for late or inaccurate filing.
In short, if you receive a gift or bequest from a foreign person, and those funds or assets were held abroad, you likely won't owe taxes on that gift. However, it is essential to comply with reporting requirements by filing Form 3520 in a timely manner in order to avoid penalties and ensure compliance with IRS rules.
2. Gifts of US-based assets have different rules and are more likely to be taxed
Many nonresident, non-US citizens own tangible assets (such as real estate) and intangible assets (such as brokerage accounts, bank accounts, and annuities) in the United States. Transferring those US-based assets – whether by gift or inheritance – comes with tax implications that can be quite complex, and specific professional guidance for your situation is always advisable. But generally speaking, here are key issues to be aware of.
Gifts and inherited assets are subject to the same general rules
Estate and gift taxes are usually lumped together because they share many of the same rules, rates, and exemption amounts. For example, US estate taxes are paid by the estate, not the person inheriting assets; similarly, gift taxes are paid by the person giving the gift, not the person receiving it. When gifts or inherited assets go over a certain threshold they are taxed at a rate that can reach as high as 40%. For most, that threshold is quite high: there is a combined exemption for lifetime gifts and estate assets, which is set at $13,610,000 for 2024. However, for some people the threshold is set much lower.
The gift and estate tax disparity for foreign nationals with US assets
Not everyone gets the $13,610,000 exemption because it is determined by residency status:
Generally speaking, a US citizen or foreign national domiciled in the United States gets a $13,610,000 million estate tax exemption; after that amount, their estate is responsible for up to a 40% tax.
Non-domiciled foreign nationals get just a $60,000 exemption – and are responsible for up to 40% of estate taxes above that amount.
The disparity is clearly significant, but the estate and gift tax exemption is not always well understood. The US Internal Revenue Service domiciliary rules for estate tax purposes can be nuanced and complicated: For example, individuals present in the US on nonresident visas (such as G-4 visas) may be considered US-domiciled for estate and gift tax purposes, even though they are considered nonresidents for US income tax purposes. The US also has tax treaties with several foreign countries, which may allow for more generous exemptions or have other tax implications that can affect a US or foreign estate.
Effective gift and estate tax planning for foreign nationals
Multinational families that want to protect their accumulated wealth should plan carefully for the best way to transfer assets across national boundaries – and to the next generation. Nonresidents with US assets must be particularly cognizant of the wide range of laws and taxation rules across different countries. The best solution for your individual situation will likely be found in consultation with a specialized professional who understands your financial goals and is familiar with the rules in the jurisdictions where you and your family members live, have assets, and have relatives you want to leave them to. Having said that, it may be worth exploring how gifting and estate planning strategies can be used in tandem to help reduce taxes owed on transferred assets.
Gifting assets while the giver is still alive
There is an annual exclusion for "present value" gifts of up to $18,000 for 2024, which means you can give anyone up to $18,000 without issue, and you don't have to report it. However, complications arise when gifts of US-based assets exceed that amount. Specifically, the person giving the gift has to file a gift tax return – IRS form 709 – for every person who receives more than $17,000 per year. And when the gift giver is a nonresident foreign national, all lifetime gifts are still subject to the low $60,000 exemption. In other words, once the combined value of all reported lifetime gifts – to all recipients – goes over $60,000, the nonresident giver has to start paying gift taxes of up to 40%.
Using US life insurance to overcome the estate tax disparity
In many cases, there's no need to transfer assets right away via annual gifts. For example, if a foreign national purchases a home in the US for their children to live in, formal transfer of ownership may not have to happen right away – it can be done later on, via the parent’s will and estate. While taxes may be owed at that point, US-denominated life insurance can help by providing the liquidity needed to cover potential estate taxes without having to sell all or a portion of the home or other holdings, preserving the estate's value for heirs.
Nonresident life insurance policies are a powerful way to help bridge the estate tax disparity because death benefit payments are generally exempt from federal estate taxes. While the nonresident exemption for estate assets is limited to $60,000, life insurance benefits are considered separate from the estate and not subject to the same limitations. That also means that that money is transferred to beneficiaries without going through the probate process, which can be time-consuming for a large estate.
These features make life insurance an attractive wealth-transfer vehicle for many foreign nationals with US-based assets. Permanent universal or whole life insurance that builds cash value can also provide a number of other advantages when it comes to estate planning and preserving family wealth:5
Portfolio diversification and risk mitigation
Permanent, whole life insurance builds cash value at a guaranteed rate and is among some of the most conservative products available. A policy can build US-denominated cash value* that can be accessed while the policyholder is still alive, acting as an effective hedge against economic downturns in one's home country, fluctuating exchange rates, and other forms of geopolitical risk.Asset protection
Life insurance policies are generally protected from creditors and bankruptcy. This can provide an additional layer of protection for foreign nationals' assets.
The Global Citizens Program
Guardian provides specialized life insurance solutions and services designed to meet the unique demands of high-net-worth international clients. Our Global Citizens Program allows qualifying clients to tap into a dedicated team that specializes in the more complex financial protection needs of clients with multinational interests – and provides white-glove service with the backing of one of the world's largest mutual life insurance companies. Clients must be non-resident, non-US citizens who demonstrate financial connections, holdings and/or family ties in the US. A dedicated case concierge team is assigned to help each applicant, and submissions are evaluated by specialized underwriters. Other key benefits include a complimentary US trust review, translation services, law firm referrals, and more. To learn more, contact a Guardian financial professional.
Have a specialist help match the appropriate life insurance solution with your estate planning goals.
If you’re a foreign national with US residency, a Guardian financial professional will work closely with you on a one-to-one basis and then tailor an estate planning solution that precisely fits your needs. Or, if you're a nonresident with ties to the US, ask about the Global Citizens Program.