United States

IRS offers guidance on gifts and bequests made by covered expatriates

Tax levied on the donor rather than the recipient of the transfer


On Sept. 10, 2015, the IRS released proposed regulations interpreting section 2801, which taxes United States citizens and residents who receive gifts or bequests from certain individuals that have either relinquished their U.S. citizenship or ceased to be lawful permanent residents of the United States on or after June 17, 2008.

Whom does this tax impact?
Although the United States typically assesses its estate tax on decedents' estates and gift tax on donors, the tax imposed under section 2801 will be assessed on U.S. taxpayers who have received a "covered bequest" or "covered gift."

What are covered gifts and bequests?
Covered gifts are direct or indirect transfers made by a covered expatriate. Covered bequests are transfers made by the estate of a deceased covered expatriate. A covered expatriate is defined under section 877A as an individual who (1) was a U.S. citizen who renounced his or her citizenship on or after June 17, 2008, or (2) was a U.S. permanent resident who terminated his or her U.S. residency status on or after June 17, 2008.

What is the tax on these transfers? 
The tax under section 2801 will be assessed at the highest prevailing applicable gift or estate tax rate upon the date of transfer. Currently, the estate and gift tax rates are 40 percent. Valuation of the gift or bequest is based on its fair market value at the time the gift or bequest is received by the U.S. citizen or resident in accordance with sections 2512 and 2031.

What are the exceptions to this tax? 
There are several exceptions to this tax, including:

  1. Taxable gifts reported by the expatriate on a timely filed gift tax return and properly included in the expatriate's timely filed estate tax return, provided that the gift or estate tax due is timely paid.
  2. Qualified disclaimers executed by the expatriate are excluded from the definition of covered gift and covered bequest.
  3. Charitable gifts and bequests that qualify for the unlimited charitable deduction are excluded from the reach of section 2801.
  4. Transfers made by the expatriate to a U.S. citizen or spouse that would qualify for the U.S. gift tax or estate tax unlimited marital deduction. This exception can be lost if the transfer is made to a non-electing foreign trust that makes a distribution to the citizen spouse. A non-electing foreign trust is a foreign trust that has not elected to be treated as a domestic trust for U.S. tax purposes.

This tax will be reported on the new Form 708 that the IRS will provide when the proposed regulations are finalized. 


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