Bravo if you’ve been lucky enough to inherit financial assets in India such as mutual funds, stocks, or bonds. You’ll need to make a choice of retaining the investments in India or moving them to the USA. Some investments are not permissible for NRIs to hold. These must be sold. You may need (or want) a financial advisor to help you through this process. Some investments such as mutual funds and ETFs will create difficulties when paying USA taxes, complicating the returns and increasing taxation. It would be wise to dispense with these assets as well, replacing them with more appropriate investments or selling them.
US tax law dictates you must declare worldwide income. You may not need to pay taxes on an inheritance but if the inheritance brings you assets that produce income you will need to pay taxes on that income. You may also owe taxes on the sale of investments, depending on the cost basis.
Mutual Funds and ETFs (Exchange Traded Funds): Special Considerations
Inheriting mutual funds or ETFs can prove tricky because the US tax implications for holding non USA-based mutual funds/ETFs are complex. These are considered “Passive Foreign Investments” which involve special rules:
You will pay income tax on any dividends, interest or other income as earned income, not with the favourable tax treatment of “capital gains”.
The tax reporting becomes complex and expensive as you must calculate and declare earned income on the funds each year, even if that information is not provided by the foreign mutual fund itself, and it generally is not. Many accountants are neither experienced at doing this nor want to, so in and of itself, it will be expensive and hard to get the job done.
If you inherit mutual funds, we suggest you contact an experienced international financial planner or US Tax Accountant used to dealing with such issues to help you. Usually liquidating the mutual funds and choosing more tax friendly investments in India, if you choose to leave the money there, is a good idea.
We do not recommend proceeding with any buying or selling without consulting a professional. Buying and selling investments will attract tax consequences and should be well planned.
Declaring Foreign Bank and Investment Accounts
There are strict rules for US Residents and Citizens on declaring the existence of foreign financial accounts. You must file an FBAR (Foreign Bank and Financial Accounts) report on a yearly basis, due on June 30. Fines vary from $500 to the greater of $100,000 or 50% of the account in question that is not reported. If a criminal penalty is imposed the fine can be up to $500,000 along with a jail sentence of up to 10 years.
These rules apply even if you are not the owner but are simply a co-signer (with your mother, for example) on a foreign account. Signature authority on an account does not necessarily make you liable for taxation, but it does require an FBAR filing. Likewise, a full power of attorney over a foreign financial account would generally require an FBAR filing (for example if you hold the power of attorney for an incapacitated relative or a minor).
If you liquidate the accounts immediately after the inheritance and repatriate the funds to the USA, consult with an accountant on how to handle the situation in terms of the FBAR filing. In our experience, things don’t always move lightning-fast in India, so from the date of death to the movement of the funds to the USA, there may be a significant time period, possibly requiring FBAR filing.
The author, Ariadne Horstman, is a financial planner at InvestmentYogi.