How should American living overseas handle inheritance

December 2, 2005 6:51 AM

Expat American hates money, inherits share of house, perhaps $100,000. Do I need an accountant, a lawyer or something else to advise?

I have no debts, but a 1-year-old baby I'd like to sock away education money for. Should I keep money stateside and invest, bring it to Japan, send it to Jersey Isle shysters? What kind of accountant/financial adviser keywords should I be looking for?

posted by planetkyoto to work & money (12 comments total)

Is the house going to be sold and then you receive a share of the proceeds, or are you inheriting an interest in a house as an investment?
posted by mr_crash_davis at 7:01 AM on December 2, 2005

I signed a quitclaim in that amount so that we could consolidate ownership of the house (our childhood home) in one brother (of four) to make it ready for sale. Now he says he's expecting to pay me within a few weeks, before the sale of the house, with proceeds from sale of some construction equipment not related to the house. Therefore, I ask now.
posted by planetkyoto at 7:16 AM on December 2, 2005

The USA will want you to pay taxes on the income/capital gains from the sale of the house. They will want you to file a return. Indeed, they always want you to file a return - the USA claims that your income, as a U.S. citizen, is always taxable to the USA even if you live and work exclusively in another country.

You can probably find an (expensive) accountant in Japan who will do your U.S. taxes for you. Since your U.S. and Japanese tax returns will be intricately bound up in each other, you'll need one accountant that can do both. I'd guess you are more likely to find a Japanese accountant who knows U.S. tax laws than a U.S. accountant who knows Japanese tax laws.
posted by jellicle at 7:28 AM on December 2, 2005

jellicle writes "Indeed, they always want you to file a return - the USA claims that your income, as a U.S. citizen, is always taxable to the USA even if you live and work exclusively in another country."

While true on it's face, that is wayyyyy too simplistic an analysis. Publication 54 details tax rules for a US Citizen abroad. In a nutshell, someone who spends most of their time abroad and has less than 80,000 in annual income doesn't have to pay any tax, even before the allowance for housing exclusion which can push the total up to $160,000. Yes, you have to file a return but that foreign income is NOT always taxable.
posted by phearlez at 7:50 AM on December 2, 2005

Also, the amount of foreign income tax you pay is deducted from the American income tax you'd owe, so you don't get taxed twice.
posted by atrazine at 7:59 AM on December 2, 2005

If you hate money, you'll hate worrying about it's management. Stick the cash into a CD and re-invest as it matures. Spread it out between a couple of banks and pay attention to what's important to you. In 17 years, that cash will be worth a lot more and you'll have never worried about it.
posted by SeizeTheDay at 8:00 AM on December 2, 2005

Sorry, that came out a bit odd. Spread it out between a couple of banks. Instead of worrying about the cash, pay attention to what's important to you.
posted by SeizeTheDay at 8:01 AM on December 2, 2005

There shouldn't be capital gains from the house if it was an inheritance - you get a step up in basis to the date of inheritance or any day up to 6 months later (I believe). Either way, the inheritor shouldn't pay tax, the estate would pay the tax - i.e., inheritance tax. It should not be treated as income in this situation. A CPA that specializes in foreign taxation should be able to clarify what you need to fill out - most CPA firms that are international would have someone in a local office that could answer this question for you.
posted by blackkar at 10:44 AM on December 2, 2005

What about when you want to take the money out of the US? All the above answers are assuming that you want to deposit in a CD or similar within the US.

I don't know if there are problems with taking that kind of cash out of the US economy (do they ding you on the way out as well?) Would Japanese taxation ding you on the way in too?
posted by 5MeoCMP at 10:59 AM on December 2, 2005

someone who spends most of their time abroad and has less than 80,000 in annual income doesn't have to pay any tax

That exclusion only applies to earned income, for example from salary. It doesn't apply to interest income or capital gains.

Some other things to worry about:
Estate and gift taxes. You want the right paper trail so that the IRS doesn't give you problems for the transaction with your brother.
Exchange rates. You might make a lot of money on your investments in dollars, but if your child wants to pay for his/her education in yen, and the bottom drops out of the dollar, he/she might end up with a lot less money than you planned for. You might want to put some of the money in dollars and some of it in yen.
Tax-deferred accounts. You might be able to find a way to make your money grow without having to pay taxes on the gains every year. This makes a big big difference over the long term.
Japanese taxes. I don't know if Japan taxes you on your worldwide income, but don't assume that because you keep the money in the US that Japan won't be interested in taxing it. That includes both inheritance taxes and taxes on the gains you'll be making every year.

Basically, if you want to do this right, you must talk to an accountant and/or tax lawyer in both the US and Japan. It's no fun at all, but you'll avoid yourself a lot of pain and suffering later on.

As an aside, if you haven't been filing tax returns in the US while you've been living overseas, you've got a big problem to deal with first. Previous AskMeFi threads on that problem here and here.
posted by fuzz at 11:12 AM on December 2, 2005

$100,000 isn't a large enough amount of money to get much personal attention from a financial adviser. So some basic advice:

(1) You can move the money to Japan, because you want to keep the money close at hand, or think that Japanese investments will do better than U.S. investments. You should NOT be looking at investing the money in any other country than the U.S. or Japan - too many regulations and potential traps, and it's not a large enough sum to pay someone else to monitor it.

(2) You can investment the money cautiously (bonds, money market funds, certificates of deposits [CDs]; you won't win big, but you only have to worry about inflation, not whether the stock market crashes]. Or you can invest in stocks, which, over the long run (15+ years is more-or-less long-run), are supposed to do better than bonds and the like. Or you can split the difference and invest partly in bonds/fixed rate stuff and partly in stocks.

(3) For bonds and the like, one of the best options is CDs, which are federally insured (as long as you stay below $100,000 [currently; may go up in future] in any one bank or financial institution's CDs). In order to get good rates (which are from longer-term CDs) yet not lock your money in, you should consider a CD ladder. (You may think that you won't want/need the money except for the kid's education, but lots of things can happen in 15+ years.)

(4) For stocks, the best option is to go through a low-cost company like Vanguard or Fidelity or Scudder ("low-cost" means that you're paying less - ideally, well less - than 1% in fees every year to fund advisers and administrative costs and trading costs), and to pick one or two funds that are not extremely aggressive/risky. For example, an index fund of the S&P 500 (which would then follow the ups and downs of a market-basket of 500 stocks) has minimal fees. You do NOT want an "actively-traded" mutual fund, even if the fund has a history of doing better than the stock market as a whole, because history often does not repeat itself. The websites for these three companies should provide plenty of information for someone interested in investing. Once you've put the money into a fund, you don't have to do anything but look at the quarterly statements to make sure the money is staying where you put it.

(5) If you're worried about the U.S. dollar dropping in value (and there are some good arguments that it will), then a U.S. mutual fund that invests in either foreign stocks or foreign bonds is a way to get some protection. (For either type of mutual fund, you would be looking for something that does NOT protect [hedge] against foreign currency swings/changes; if it does protect/hedge for this, then you still lose if the U.S. dollar declines in value. (I'm not sure if the three investment companies listed above have such funds; again, the website should make this clear.)
posted by WestCoaster at 11:42 AM on December 2, 2005

Thanks everyone for the information and tips. I'll be looking for a CPA with relevant experience. Having lived here 11 years, I'm experienced with the foreign earned income exemption.
posted by planetkyoto at 3:12 PM on December 2, 2005