IsraelLaw
Every year, US citizens receive a succession order from the Israeli Registrar of Inheritance Affairs, transfer a Tel Aviv apartment into their name, and assume the entire process is now complete. Israel took no tax. The Israeli bank released the account. The apartment is registered in their name. What they often have not done is pick up the phone to their US accountant.
The US reporting requirements around foreign inheritances are separate from the Israeli legal process, run on a completely different timetable, and carry penalties that can exceed the value of a modest inheritance. This guide covers each obligation in turn, explains when the clock starts running, and describes the practical steps that reduce the risk of an IRS penalty for something that nobody told you needed to be filed.
1. Who Must Report: US Persons and the Foreign Bequest Rule
The reporting obligation falls on "US persons" as defined in the Internal Revenue Code: US citizens wherever they live, lawful permanent residents (green-card holders), and individuals who meet the substantial presence test for US tax residency in a given year. If you hold US citizenship but live full-time in Israel, you are still a US person for these purposes. Renouncing citizenship extinguishes the obligation for future years but not for years in which you were a citizen and received a reportable bequest.
The obligation is triggered when a US person receives, in a single calendar year, more than $100,000 in bequests or inheritances from one or more foreign persons. A "foreign person" is anyone who is not a US citizen or US resident for tax purposes. Most Israeli relatives of American diaspora families qualify: an Israeli parent, grandparent, sibling, or uncle who was not a US person is a foreign person for these purposes, and their estate is treated as a foreign person as well.
The $100,000 threshold is cumulative across all bequests received from foreign persons in the year, not per transaction. If you received NIS 200,000 from a bank account and your share of an apartment valued at NIS 800,000, the combined amount is what counts.
The IRS defines a foreign person by exclusion: anyone who is not a US citizen, green-card holder, or person who met the substantial presence test in the year of death. An Israeli parent who made aliyah and held only Israeli citizenship is a foreign person. An Israeli parent who also held a US passport or had a green card may not be, and different rules apply (the estate may need to file a US estate return). Where there is any doubt about the deceased's US tax status, the safer assumption for Form 3520 purposes is that a filing is required. The penalty for an unnecessary filing is zero; the penalty for a missing required filing starts at $10,000.
2. IRS Form 3520: What It Is and How to File
Form 3520, "Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts," is an informational return. It collects data about the inheritance for the IRS's foreign financial tracking system. No US tax is assessed on the receipt of a foreign bequest as a result of this filing, but the IRS matches Form 3520 data against FBAR filings, bank-reported FATCA data, and other information returns to identify people who received large foreign transfers without reporting them.
Part IV of Form 3520 is the relevant section for a foreign bequest. You report the name and country of residence of the foreign person whose estate you inherited from, the date you received the property, and the amount in US dollars. For real estate, you use the fair market value in NIS converted to USD at the Bank of Israel's official exchange rate on the date you received title. For bank accounts, you use the USD equivalent of the NIS amount at the date of transfer.
Form 3520 is due on the same date as your individual income tax return. For most US filers that is April 15 of the year following the year of receipt. If you file a Form 4868 extension, Form 3520 is automatically extended to October 15 as well. The form is filed separately from your tax return: it is not attached to Form 1040 but goes to its own IRS address (Ogden, Utah, or the international address depending on your location).
Under IRC Section 6039F, the penalty for failing to file Form 3520 for a foreign bequest is the greater of $10,000 or 5% of the gross amount received for each month (or fraction of a month) the failure continues, up to a maximum of 25% of the total amount. On a $300,000 inheritance left unreported for six months, the penalty can reach $15,000. The IRS does not need to prove willfulness: the penalty is automatic. You can request abatement by showing reasonable cause (typically, reliance on a professional who failed to advise you), but those requests are not always successful and require documentation. The practical protection is filing late and voluntarily rather than waiting for an IRS notice: a voluntary late filing with an explanation generally receives more favorable treatment than one triggered by an examination. If you missed the Form 3520 for a prior year, consult a US tax attorney before filing; the IRS has specific procedures for this situation and the approach depends on whether an examination has already started.
3. FBAR for Inherited Israeli Bank Accounts
The Report of Foreign Bank and Financial Accounts (FBAR), filed on FinCEN Form 114 through the Bank Secrecy Act Electronic Filing System, is required for any US person who has a financial interest in, or signature authority over, a foreign financial account with an aggregate value exceeding $10,000 at any point during the calendar year.
The moment you inherit an Israeli bank account and the Israeli bank records you as the account owner following a succession order, you have a financial interest in that account. If the account balance exceeded $10,000 (approximately NIS 37,000 at current rates) at any point during the year, you must file FBAR for that year. You must continue filing every year you hold the account.
The threshold is not about what you earned or received: it is about whether the account balance crossed $10,000, even briefly. An heir who inherited an Israeli account with NIS 200,000, withdrew most of it immediately, and ended the year with a balance of NIS 2,000 still had an account balance above $10,000 during the year and is required to file.
FBAR is filed electronically through the FinCEN portal, is due April 15 with an automatic extension to October 15, and is not part of the tax return. Penalties for willful non-compliance run to the greater of $150,000 or 50% of the account balance per violation. Non-willful penalties are up to $15,000 per violation. Criminal exposure exists for willful violations. The IRS and FinCEN have mounted systematic enforcement programs using FATCA data from Israeli banks, which are required to report US person accounts to the Israeli Tax Authority for transmission to the IRS under the Israel-US FATCA agreement.
Israeli banks are obligated to identify US-person account holders and report their account data annually to the Israel Tax Authority (Rashut HaMisim) under the Foreign Account Tax Compliance Act Implementation Regulations 5774-2014. The Israel Tax Authority transmits this data to the IRS under the bilateral intergovernmental agreement. Israeli banks routinely ask new account holders and existing account holders to confirm their US person status with a W-9 or W-8BEN form, and the bank's FATCA reporting records when an account is opened by a US person following an estate distribution. If your Israeli inherited account appears in Israel's FATCA reporting but you have not filed a corresponding FBAR and Form 3520, the IRS matching system can flag the gap. The time to fix a missed FBAR is before that flag becomes an examination.
4. FATCA Form 8938 and Inherited Israeli Assets
FATCA Form 8938, "Statement of Specified Foreign Financial Assets," is filed as part of your annual income tax return (Form 1040). It applies when the total value of your specified foreign financial assets exceeds certain thresholds, which vary based on whether you are filing as a single person or jointly, and whether you live in the US or abroad.
For single filers living in the US, Form 8938 is required when specified foreign financial assets exceed $50,000 at year-end, or $75,000 at any point during the year. For married filers living in the US, the thresholds double. For US persons living abroad, the thresholds are higher still: $200,000 at year-end or $300,000 at any point. Failing to file Form 8938 triggers a $10,000 penalty, with an additional $10,000 for each 30-day period of continued non-compliance up to $50,000.
For an Israeli inheritance, the relevant assets include Israeli bank accounts, Israeli investment accounts and brokerage holdings, and interests in Israeli foreign entities. Real property held directly (title in your name at the Land Registry) is generally not a specified foreign financial asset for Form 8938 purposes, though any Israeli entity (company, trust) through which property is held would be reportable. An Israeli pension or provident fund that you inherited would count toward the threshold.
Form 8938 and FBAR cover similar ground but are not duplicative: FBAR covers only financial accounts, while Form 8938 covers financial accounts plus interests in foreign entities. Both may be required for the same assets, and both must be filed.
5. When the Reporting Obligation Arises
This question trips up more people than any other. The Form 3520 obligation arises in the tax year you actually receive the property, not the year the person died, and not the year the succession order was issued.
Israeli probate frequently takes twelve to twenty-four months. If someone died in 2024 but the succession order did not issue until March 2026, and the Israeli bank transferred the funds to you in June 2026, your Form 3520 is due for the 2026 tax year, filed by April 15, 2027 (or October 15, 2027 with extension). You do not file for 2024 or 2025 even though the death and the legal proceedings occurred then.
For real estate, the "receipt" date is typically when title registers in your name at the Land Registry or the Israel Land Authority, whichever applies. For bank accounts, it is when the bank releases the funds to you. For a mixed estate distributed in stages across multiple years, you file Form 3520 for each year in which the amount you received in that year exceeds $100,000, or aggregate with other foreign bequest receipts in the same year to determine whether the threshold is crossed.
Form 3520 requires the value reported in US dollars. For cash received from an Israeli bank account, use the IRS-acceptable exchange rate for the date of receipt. The IRS accepts the Bank of Israel daily representative rate (shaar yaatzgi), published on the Bank of Israel website, as the official NIS/USD rate. For real estate, you need a valuation (appraiser's report or agreed estate value from the Israeli probate file) in NIS, converted at the Bank of Israel rate on the date you received title. Do not use the day of death exchange rate for real estate unless that was also the day title transferred to you. Keep copies of the Bank of Israel rate page for the relevant dates, the succession order or probate order, and any title documents, since these form the basis of your Form 3520 if the IRS asks for substantiation.
6. State Inheritance Taxes on Israeli Assets
Six US states impose inheritance taxes, and unlike the federal estate tax (which is charged against the estate of the deceased), state inheritance taxes are charged against the heir based on what they receive. These taxes apply regardless of whether the assets were located in Israel, the UK, or anywhere else. What matters is where the heir lives and the relationship between the heir and the deceased.
Pennsylvania charges inheritance tax at 4.5% for direct descendants (children, grandchildren), 12% for siblings, and 15% for everyone else. Maryland charges 10% on bequests to people who are not immediate family, with a $1,000 exemption and credits for taxes paid to other jurisdictions. Nebraska's rates range from 1% for direct descendants to 18% for remote relatives, with a phased repeal planned through 2027. New Jersey imposes tax at 11% to 16% on bequests above $25,000 to distant relatives or unrelated persons; direct descendants are exempt. Kentucky's Class A beneficiaries (spouses, children, grandchildren, parents) are exempt; Class B (siblings, nieces, nephews, daughters-in-law) pay 4% to 16% on amounts above $1,000; Class C (everyone else) pay 6% to 16%. Iowa abolished its inheritance tax for deaths occurring after January 1, 2025.
These taxes are filed and paid in the state where the heir lives, not the state where the deceased lived or where the assets were located. A US citizen who lives in Pennsylvania and inherits from an Israeli relative owes Pennsylvania inheritance tax on the full value received, even though the deceased was not a Pennsylvania resident and the assets were Israeli bank accounts and real estate. The rate depends on the heir's relationship to the deceased under the applicable state law.
Pennsylvania requires an inheritance tax return to be filed within nine months of the date of death, and the tax itself is due within nine months to avoid interest. For a foreign inheritance, many heirs delay because the Israeli probate process is not complete. But Pennsylvania does not pause its deadline for foreign probate. The practical approach is to pay an estimated amount within nine months (calculated on the best available valuation), file a preliminary return, and supplement when the exact amounts are known. The Pennsylvania Department of Revenue accepts this approach and confirms it in its estate administration instructions. The penalty for late payment is interest at the statutory rate plus a 5% discount that is lost if the tax is not paid within three months. A Pennsylvania attorney or accountant should be engaged at the same time you instruct the Israeli attorney.
7. UK and Canadian Reporting Obligations
US-specific reporting dominates this area because the IRS compliance infrastructure is the most developed, but UK and Canadian heirs have their own obligations worth noting.
UK residents and domiciliaries who receive an inheritance do not pay UK income tax on the receipt. However, they must report overseas income and gains arising from the inherited assets going forward. A UK resident who inherits an Israeli bank account earning interest, or who inherits an Israeli apartment and later sells it at a gain, must include those amounts in their UK self-assessment return. HM Revenue and Customs maintains a register of UK residents with foreign accounts through the Common Reporting Standard, and Israeli banks report UK-resident account holders to the Israel Tax Authority for transmission to HMRC. UK residents who have not been filing UK self-assessment returns for Israeli income should consult an accountant before the inheritance lands additional income in the system.
Canada applies a deemed-disposition rule at death: the deceased is treated as having sold all assets at fair market value immediately before death. This generates Canadian tax in the deceased's terminal return, not in the heir's hands. The heir then takes the assets at a stepped-up cost equal to the fair market value at the date of death. When the heir later sells an inherited Israeli property, only the gain since the date of death is subject to Canadian capital gains tax. Canada requires foreign asset reporting on Form T1135 (Foreign Income Verification Statement) for Canadian residents with foreign property costing more than CAD 100,000. Inherited Israeli real estate counts toward this threshold from the date the title transfers to the Canadian heir.
8. Practical Steps After Receiving the Succession Order
The Israeli succession or probate order is the trigger for most of the downstream obligations. Here is the sequence that reduces the risk of missing a deadline.
When the Israeli Registrar of Inheritance Affairs issues the order, record the date. That date starts the clock for the FBAR obligation in the calendar year in which you receive it (assuming the account balance exceeds $10,000). Get the Israeli attorney to confirm the date on which each asset transfers to you: real estate registers at the Land Registry, bank accounts release at the branch level, and the dates may differ by weeks or months.
Notify your US accountant immediately of the succession order issuance and the expected transfer dates. Provide the estimated value of each asset in NIS. Your accountant needs this to advise on Form 3520 and FBAR timing and to add these items to your tax-year checklist before you miss a deadline that has been running since the order issued.
If you live in Pennsylvania, Maryland, Nebraska, New Jersey, or Kentucky, contact a licensed attorney or CPA in that state about state inheritance tax. Do this in parallel with the Israeli process, not after it concludes.
Keep the Bank of Israel exchange rate for every date on which a significant transfer occurs. A PDF of the relevant page from the Bank of Israel website is sufficient. This is what you use to complete the USD amounts on Form 3520.
When you bring your US accountant into the process, give them: (1) The Israeli succession order or probate order (tzav yerusha or tzav kiyum tzava'a) with a certified Hebrew-to-English translation. (2) The Israeli bank statement showing the date and amount of each transfer from the estate account to your account. (3) The Land Registry extract (nesach tabu) showing your name as registered owner and the date of registration. (4) Any Israeli estate appraisal or valuation prepared for the probate process. (5) The Bank of Israel representative exchange rate for each date of transfer. With these documents, completing Form 3520 is straightforward. Without them, your accountant is working from estimates that may trigger IRS requests for substantiation. The Registrar of Inheritance Affairs issues certified copies of orders for a nominal fee; order several when the order issues, since certified copies sent to Israeli banks and the Land Registry are consumed by the process and you need one for your own records.
Frequently Asked Questions
Yes, if the total value of what you received from the estate exceeds $100,000 in a single year. You report it on IRS Form 3520, Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts. No US tax is owed on the inheritance itself, but the form is mandatory. Failure to file triggers a penalty equal to the greater of $10,000 or 5% of the amount received per month of non-compliance, up to 25% of the total amount.
Form 3520 is filed for the tax year in which you actually received the funds or assets. If the Israeli estate takes two or three years to settle, you file only for the year or years in which the actual distribution came to you. The due date is the same as your individual income tax return: April 15 for most filers, automatically extended to October 15 if you request an extension on Form 4868.
FBAR applies whenever the aggregate balance of all your foreign financial accounts exceeds $10,000 at any point during the calendar year, even for a single day. The threshold is not about annual income; it is about the account balance. If you inherit an Israeli bank account with NIS 40,000 (roughly $11,000), FBAR reporting is required for that year and every subsequent year you hold the account, regardless of whether the account earns any interest.
Yes. Real property inherited from a foreign person counts toward the $100,000 threshold on Form 3520 and is valued at its fair market value on the date of receipt. Use the Bank of Israel's official exchange rate to convert NIS to USD. Real property is not a financial account so it is not reported on FBAR, but it may appear on FATCA Form 8938 depending on your total foreign asset values. When you later sell the property, the gain is reportable on your US income tax return as a capital gain.
It depends on which state you live in. Most US states have no inheritance tax. Pennsylvania charges 4.5% for direct descendants, 12% for siblings, and 15% for others. Maryland charges 10% for non-exempt beneficiaries. Nebraska, New Jersey, and Kentucky also impose inheritance taxes at varying rates. Iowa abolished its inheritance tax for deaths after January 1, 2025. The tax is assessed on what you receive, not on the deceased's estate, and applies even when the assets were located in Israel.