U.S. citizens and long-term permanent residents who are considering relinquishing their U.S. citizenship or long-term permanent residency in the U.S. have more than just the exit tax imposed under Code § 877A to consider – they must also consider the impact the expatriation will have on their U.S. family members and other intended U.S. beneficiaries. Once final regulations are published for the tax imposed under Code § 2801, a U.S. recipient of gifts and bequests from certain individuals who have relinquished their U.S. citizenship or long-term permanent residency in the U.S. (a so-called Covered Expatriate) will need to file a new Form 708, U.S. Return of Gifts or Bequests from Covered Expatriates (Form 708), to report all such gifts and bequests received since June 17, 2008 from a Covered Expatriate and pay the tax that is due.[i]
Gifts and Bequests Considered Covered Transfers
Code § 2801 imposes a tax on any U.S. citizen or resident who receives a “covered gift” or a “covered bequest” from a Covered Expatriate, regardless of when the Covered Expatriate acquired the transferred property or the situs of the property. The tax imposed by Code § 2801 is assessed at the highest gift or estate tax rate in effect at the time of the transfer (40% in 2016). Whether the transfer is a “covered gift” or a “covered bequest” depends on whether the donor or decedent is a Covered Expatriate. A Covered Expatriate is an individual who relinquished his or her U.S. citizenship or terminated his or her long-term permanent resident status on or after June 17, 2008 and, on the date of his or her expatriation, the individual either meets a U.S. income tax liability test (in 2016, $161,000 average net income tax liability over five years, indexed annually for inflation), or meets a net worth test of $2 million (not indexed annually for inflation), or fails to certify, under penalty of perjury, that he or she has complied with all U.S. tax obligations for the five preceding taxable years.
There are notable exceptions for transfers that are properly reported by the Covered Expatriate (or his or her personal representative) on timely filed gift or estate tax returns (for example, a gift of U.S. real property that is reported on a gift tax return), or for transfers to charitable organizations or certain spouses as long as the transfer would qualify for the estate or gift tax charitable or marital deduction.
Are You Subject to Code § 2801 Tax?
The burden for reporting a covered gift or bequest and paying the Code § 2801 tax is placed on the U.S. recipient. These obligations relate back to June 17, 2008 and include all covered gifts and bequests received since that date. Further, under the proposed regulations the U.S. recipient also has the burden of determining whether he or she received a covered gift or bequest – meaning the U.S. recipient must determine whether the donor or decedent is or was a Covered Expatriate. The proposed regulations provide that, with the consent of the expatriate (if living), the U.S. recipient may request that the IRS disclose certain return information of the expatriate. However, the IRS will not make a determination of the expatriate’s status. This means it is very important for each U.S. individual who has received a gift or bequest from an expatriate to start collecting information from the expatriate or his or her estate now to determine whether that gift or bequest will be subject to the Code § 2801 tax so that he or she will be prepared to file a Form 708, if required, once final regulations are published.
Expatriates: U.S. citizens and long-term permanent residents who are thinking of expatriating may consider making pre-expatriation gifts to U.S. recipients to take advantage of their lifetime gift tax exemption ($5,450,000 in 2016 reduced by prior year taxable gifts) and reduce the post-expatriation Code § 2801 tax consequences for their intended U.S. beneficiaries. In addition, since a U.S. recipient of a covered gift or bequest is allowed an annual exclusion amount under Code § 2801(c) equal to the gift tax annual exclusion amount ($14,000 in 2016), the Covered Expatriate may consider limiting their annual gifts to U.S. recipients to this Code § 2801(c) amount.
U.S. Recipients: Given the Code § 2801 tax rate of 40%, a U.S. recipient of a prior or future covered gift or bequest will need to set aside adequate funds for payment of the tax liability. Further, if a U.S. individual expects to receive a large covered gift or bequest from a Covered Expatriate, he or she may consider relinquishing his or her own citizenship or residency before receiving such gift or bequest.
See the full IRS Proposed Regulations here.
[i] Under the proposed regulations, the Form 708 will be due on or before the 15th day of the 18th calendar month following the close of the calendar year in which the covered gift or bequest is received, giving most U.S. recipients ample time to gather the information necessary to file the return. U.S. recipients who receive a covered gift or bequest before the final regulations are published will be given a reasonable period of time to file the Form 708 and pay the Code § 2801 Tax.