Most Americans living outside the United States assume that once they leave, U.S. tax and estate law becomes less relevant to their lives. The reality is the opposite. Estate planning for U.S. citizens abroad is more complex than domestic planning because U.S. law follows you regardless of where you live, where your assets are held, or how long you have been gone.
This blog is for U.S. citizens living abroad who have assets in multiple countries, foreign bank accounts, non-citizen spouses, or simply have not revisited their estate plan since moving overseas. By the time you finish reading, you will understand how U.S. estate tax applies to your worldwide assets, what reporting obligations are required of you, and what a sound expat estate plan actually looks like in practice.
Does the U.S. Tax Americans on Assets They Hold in Other Countries?
Yes, and this is one of the most consequential features of U.S. tax law for Americans living abroad. The United States is one of only two countries in the world that taxes its citizens based on citizenship rather than residency. This means that a U.S. citizen living permanently in London, Paris, or Sydney is subject to U.S. income tax, gift tax, and estate tax on their worldwide income and assets, regardless of where they live or where their assets are held.
For estate tax purposes, a U.S. citizen’s gross estate includes every asset they own anywhere in the world at the time of death. This includes:
- Foreign Real Estate: Valued at fair market value as of the date of death and converted to U.S. dollars at the applicable exchange rate.
- Foreign Bank and Investment Accounts: Including accounts at foreign branches of banks in any currency.
- Foreign Business Interests: Including ownership stakes in foreign corporations and partnerships.
- Foreign Retirement and Pension Accounts: Though the treatment of foreign plans is complex and depends on the specific structure of the plan and any applicable tax treaty.
- Tangible Personal Property: Including artwork, jewelry, and collectibles physically located abroad.
The federal estate tax exemption applies to U.S. citizens regardless of where they live, so for many expats the worldwide estate tax exposure does not generate an actual tax bill. But the reporting obligations exist regardless of whether tax is owed, and the interaction between U.S. estate tax and the estate or inheritance taxes of the country where the expat lives creates a genuine double taxation risk that requires active planning.
The foreign tax credit on Form 706 provides partial relief by allowing the estate to credit taxes paid to foreign governments against the U.S. estate tax liability on the same assets. However the credit does not always fully offset the combined burden, particularly where the foreign country’s tax rates exceed U.S. rates or where the two systems calculate taxable value differently.
What Reporting Obligations Apply to Americans with Foreign Assets?
The U.S. imposes an extensive set of reporting obligations on Americans with foreign assets. These exist independently of tax liability, and the penalties for non-compliance are substantial. Unreported accounts during your lifetime can create catastrophic complications for your estate after death.
- FBAR (FinCEN Form 114): Required if the aggregate value of all foreign financial accounts exceeds $10,000 at any point during the year. The penalty for willful failure to file can reach the greater of $100,000 or 50% of the account balance per violation.
- FATCA (Form 8938): Required for foreign financial assets above certain thresholds (for single expats, this is $200,000 on the last day of the year or $300,000 at any point). It covers a broader range of assets than FBAR, including foreign stock and partnership interests.
- Form 5471: Required for U.S. citizens who own 10% or more of a foreign corporation. This is a common requirement for expats who hold assets through a foreign holding company.
- Form 3520: Required if you receive gifts or bequests from foreign persons exceeding $100,000 in a calendar year. Penalties can reach 35% of the gift amount.
- Form 8621 (PFICs): Required for ownership in “Passive Foreign Investment Companies,” which includes most foreign mutual funds. Many expats unknowingly hold these in foreign retirement accounts, leading to punitive tax rates.
- Form 8854 (Exit Tax): Relevant for those considering renouncing U.S. citizenship. If you meet certain net worth thresholds (typically $2 million), you may be treated as having sold all worldwide assets at fair market value the day before expatriation.
How Should an Expat Structure Their Estate Plan?
Estate planning for U.S. citizens abroad must address U.S. law, the law of the country where the expat lives, the law of every country where they own assets, and the interactions between all of those systems at once. There is no single template that works for every situation, but there are core elements that almost every comprehensive expat estate plan should address.
Establish domicile clearly. Domicile determines which country’s succession laws govern the distribution of movable assets. For expats, domicile is often ambiguous, particularly for those who move frequently or maintain homes in multiple countries. Ambiguous domicile invites competing claims from multiple jurisdictions. An expat estate plan should establish domicile deliberately through consistent behavior, documentation, and legal declarations.
Coordinate a multi-will structure. Most expats with assets in multiple countries need a coordinated set of wills, each governing assets in a specific jurisdiction, drafted with full awareness of the others. As with any multi-jurisdictional estate plan, each will must explicitly limit its revocation provisions to avoid unintentionally canceling a parallel document in another country.
Address the non-citizen spouse issue proactively. For expats married to non-U.S. citizen spouses, the unlimited marital deduction is not available without a Qualified Domestic Trust (“QDOT”). Many expats are married to foreign nationals, making this one of the most common and consequential planning gaps in expat estate plans. Whether the right solution is a QDOT, lifetime gifting, or restructuring asset ownership depends on the specific circumstances and must be analyzed with full knowledge of both U.S. law and the law of the country where the couple lives.
Review beneficiary designations across all jurisdictions. Beneficiary designations on U.S. retirement accounts, life insurance policies, and payable-on-death accounts control the disposition of those assets regardless of what any will says. For example, a designation naming a non-citizen spouse as direct beneficiary of a large IRA may create a significant income tax burden that would not exist if the IRA passed to a properly structured trust.
Build in a regular review cycle. Expat estate plans are exposed to legal changes in multiple jurisdictions simultaneously. A treaty termination, a change in foreign succession law, a move to a new country, or a change in family circumstances can all render a previously sound plan inadequate. An annual or biennial review with international estate planning counsel is a necessary part of maintaining a plan that actually works.
One additional point worth noting for New York-connected expats: New York State has an aggressive residency audit program and applies a facts-and-circumstances test to determine whether someone who claims to have left New York has actually severed their domicile. An expat who maintains a New York apartment, whose family remains in New York, or who spends significant time in the state may find that New York continues to assert income tax and estate tax jurisdiction regardless of where they claim to be domiciled.
Frequently Asked Questions
Does a U.S. citizen living abroad still owe U.S. estate tax?
Yes. The U.S. taxes its citizens on their worldwide estate regardless of where they live or where their assets are held. The federal estate tax exemption applies to U.S. citizens living abroad, so many expats will not owe federal estate tax, but the reporting obligations exist regardless of whether tax is owed, and the interaction with foreign inheritance taxes requires active planning.
What happens if a U.S. citizen abroad does not file their FBAR or FATCA forms?
The penalties for non-compliance are significant. Willful failure to file an FBAR can result in penalties reaching the greater of $100,000 or 50% of the account balance per violation per year. FATCA penalties start at $10,000 per violation with additional penalties for continued non-compliance after IRS notification. Non-compliance during a person’s lifetime can also create complications for their estate after death.
Does my U.S. will cover assets I own in other countries?
Not automatically. Whether your U.S. will is recognized abroad depends on the laws of the country where the assets are located. Real property in particular is almost always governed by the law of the country where it is physically located, and local probate must be completed regardless of what a foreign will instructs. Most expats with assets in multiple countries benefit from a coordinated multi-will structure drafted with international planning oversight.
