Do I have to report an Israeli inheritance to the IRS on Form 3520?

An American who inherits from an Israeli parent usually braces for a tax bill and is relieved to learn there is none — Israel scrapped its estate duty decades ago, and the US does not tax the receipt of an inheritance as income. The relief sometimes turns into a costly mistake, because the absence of tax does not mean the absence of paperwork. The IRS still wants to know the money arrived, and the penalty for staying silent is steep.

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Detailed Explanation

Take the two countries in turn. On the Israeli side, there is no inheritance or estate tax. Israel repealed the Estate Duty Law in 1981, so an estate passing under an Israeli succession order or will execution order is distributed without any Israeli death tax. What the Israeli process produces is the succession order from the Inheritance Registrar (Rasham HaYerushot) that lets the heirs collect the assets — our guide on administering an Israeli estate from abroad walks through obtaining it.

On the US side, receiving an inheritance from a foreign (non-US) person is not taxable income to the heir. But a US person — citizen, green-card holder, or resident — who receives more than USD 100,000 in gifts or bequests from a non-resident alien or foreign estate during the year must report it. The vehicle is Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts, filed with the IRS by the due date of the heir's Form 1040, including extensions.

In Practice: Israel charges no inheritance tax — the Estate Duty Law was repealed in 1981 — so the Israeli succession order from the Inheritance Registrar releases assets without a death tax. A US heir who receives more than USD 100,000 from the Israeli estate must nonetheless report it on IRS Form 3520, Part IV, by the 1040 due date. Late or missing filing triggers penalties under IRC §6039F of up to 25% of the bequest — for a USD 400,000 inheritance, that is a potential USD 100,000 penalty for a return that itself produces no tax.

The reporting rarely stops at Form 3520. An Israeli inheritance often arrives as a bank or brokerage account rather than cash. The moment those Israeli accounts are yours, you step into the US foreign-account regime: the FBAR (FinCEN Form 114) if your foreign accounts exceed USD 10,000 in aggregate, and potentially Form 8938 under FATCA. Inheriting shares in an Israeli company or holdings in Israeli mutual funds can also pull in the PFIC rules and Form 8621. The bequest is tax-free; the ongoing ownership is heavily reportable.

Key Considerations

• Israel imposes no inheritance or estate tax — the death-tax bill you fear does not exist on the Israeli side.
• A US heir must file Form 3520 once foreign gifts and bequests for the year exceed USD 100,000.
• The §6039F penalty for non-filing reaches 25% of the amount, despite no tax being due.
• Inherited Israeli accounts pull you into FBAR and possibly FATCA Form 8938 reporting going forward.
• Inherited Israeli shares or funds can trigger PFIC reporting on Form 8621 — get advice before selling.

When to Consult a Lawyer

This question typically requires professional legal advice when:

• The inheritance includes Israeli accounts, shares, or fund holdings with ongoing US reporting.
• You missed a Form 3520 deadline and need to address the penalty exposure.
• The Israeli succession process and the US filing have to be coordinated on timing and valuation.

A qualified Israeli attorney working alongside your US tax adviser should coordinate the succession order and the US reporting before funds are transferred.

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Speak With an Israeli Attorney

We obtain the Israeli succession order, release inherited Israeli assets to heirs abroad, and coordinate with US advisers so the Form 3520 and account-reporting deadlines are met.

Contact us for a confidential initial consultation.