Title: The IRS Decision on Transfer Tax for Gifts and Bequests from 'Covered Expatriates'
After a seventeen-year wait, the IRS finally released final regulations implementing IRC Section 2801 on January 10, 2025. This legislation aims to clarify the tax implications for U.S. persons receiving gifts or bequests from former U.S. citizens and long-term resident green card holders who've expatriated.
At heart, Section 2801 imposes a 40% transfer tax on "covered gifts" and "covered bequests" received by U.S. individuals from "covered expatriates." A covered expatriate is an individual who meets certain criteria, including having a net worth of $2 million or more or having an annual net income tax liability exceeding a certain amount.
The regulations issued are intricate, spanning 129 pages and leaving various issues unresolved. For instance, the tax responsibilities for U.S. taxpayers who received a gift or inheritance prior to the regulations but post-enactment of Section 2801 are still unexplored.
Expatriation tax laws have evolved numerous times, with the IRS taking a closer look at expatriations in recent years. The following sections delve into key aspects of IRC Section 2801, including definitions, transfer tax, exceptions, and reporting requirements.
Covered Gifts and Bequests: Detailed Overview
Covered gifts generally encompass any property transferred as a gift from a covered expatriate to a U.S. recipient. Covered bequests include property acquired due to a covered expatriate's death, including property rights passing under a right of survivorship, annuity payments, property subject to a general power of appointment, and life insurance proceeds.
Powers of appointment, typically seen in trusts and wills, require special attention in the context of the transfer tax. The exercise or release of a general power of appointment held by a covered expatriate over property for the benefit of a U.S. citizen or resident can be a covered gift or covered bequest. Similarly, the grant to a U.S. person by a covered expatriate of a general power of appointment over property can be a covered gift or covered bequest to the powerholder.
Expatriated Trusts and the Transfer Tax
When a covered gift or covered bequest is made to a foreign trust, Section 2801's tax applies to any distribution to a U.S. recipient from that trust, whether income or corpus. The distribution's portion attributable to covered gifts or bequests includes the ratable portion of any appreciation and income that has accrued since the covered gift or bequest was initially contributed to the trust.
In certain instances, such as when there are various donors to a foreign trust or when contributions to the trust were made both before and after the donor's expatriation, record-keeping becomes particularly crucial.
Exceptions to Section 2801 Transfer Tax
The regulations highlight several exemptions to the 40% tax, such as gifts or bequests already subject to U.S. gift or estate taxes, gifts that qualify for the annual gift tax exclusion, and gifts to a U.S. citizen spouse or qualified charities.
Reporting and Payment of Section 2801 Transfer Tax
U.S. recipients are responsible for paying the transfer tax, which is computed based on the fair market value of the transferred property and the maximum gift or estate tax rate, currently 40%. They must file IRS Form 708 to report and pay the tax once the form becomes available.
Expatriates should keep detailed U.S. tax records, obtain tax returns and transcripts directly from the IRS, and maintain all documentation with important papers, such as wills, to facilitate tax reporting and payment. It is also suggested to consult tax professionals when determining transferor status and navigating the regulations.
[1] U.S. Department of the Treasury, IRS (2025), T.D. 9991, 80 Fed. Reg. 6045 (Jan. 10, 2025).[2] T.D. 9988, 75 Fed. Reg. 71064 (Oct. 1, 2010).[3] Note: This coverage only addresses direct financial consequences. Please consult a tax professional or legal advisor for additional legal, ethical, and moral implications.
- Under Section 2801 of the U.S. tax law, a 40% transfer tax is imposed on covered gifts and covered bequests received by U.S. individuals from covered expatriates, as outlined in the final regulations released by the IRS on January 10, 2025.
- The IRS regulations on Section 2801 clarify that a covered expatriate is an individual who meets certain criteria, such as having a net worth of $2 million or more or an annual net income tax liability exceeding a certain amount, as per the irs.gov guidelines.
- For U.S. taxpayers who received a gift or inheritance prior to the regulations but post-enactment of Section 2801, the tax implications are still unclear and require further examination by the IRS.
- Green card holders who subsequently expatriate and become covered expatriates under U.S. tax law should be aware of the ramifications for covered gifts and bequests they make to U.S. individuals, including potential transfer tax liabilities and reporting requirements.
