U.S. Estate Tax Follows Expatriates Under Section 2801

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ina Turner’s death in May 2023 sparked an interesting consideration for the estates of expatriates. She relinquished her citizenship in late 2013, approximately ten years before her death and resided in Switzerland at her death. Despite being a noncitizen of the U.S. at her death, Turner may have been subject to U.S. income and estate taxes depending upon whether she was considered a covered expatriate and whether she had assets that would be considered U.S. assets taxable in her estate. The impact of the estate tax could deplete 40% of the assets subject to tax at her death. Given her substantial wealth, it is likely that she engaged in significant planning that minimized or eliminated any tax exposure regardless. However, if she had made transfers either during her lifetime or at death to any U.S. beneficiaries, significant tax compliance and payment obligations could have resulted for both the beneficiaries and her estate. The following is a brief overview and some of the common considerations for expatriates in similar situations where they may not consider having the U.S. tax system apply even where they have no direct investments in the U.S.

Section 2801: The Expatriation Tax For Estates and Gifts

IRC Section 2801 imposes a tax on U.S. citizens or residents on the receipt of “covered gifts” or “covered bequests” from individuals who fall within the definition of a covered expatriates. The tax is imposed on all transfers, whether during the expatriate’s lifetime or at death, as an estate tax.

The law provides that the individual would be a covered expatriate if any of the following apply: (1) Had an average annual net income tax liability exceeding a specified threshold aligned with an inflation adjusted amount for five years preceding the date of expatriation, (2) Had a combined net worth of $2 million or more on all assets globally on the date of expatriation, or (3) Was noncompliant with U.S. tax obligations for five years preceding expatriation. Tax obligations extend beyond income tax to certain excise taxes as well that may be considered with personal income tax obligations. Section 2801 imposes the highest estate tax rate in effect at the time of the gift or bequest. This rate is currently 40%.

Form 708: Reporting Requirements For Expatriates

In January 2025, the U.S. Congress issued final regulations on the taxation of gifts and bequests from covered expatriates. These regulations introduced the filing of a new Form 708 to report these transfers. Form 708 must be filed by U.S. recipients of covered gifts or bequests by the 15th day of the 18th month following the end of the year in which they received the covered gifts or bequests. Noncompliance subjects the recipients to significant penalties.

Section 2801: Foreign and Domestic Trusts Funded by Expatriates

The trust classification controls whether transfers made to trusts by covered expatriates fall within the purview of the reporting requirements and tax:

• Domestic Trusts and Electing Foreign Trusts: Section 2801 imposes reporting and tax obligations directly on the trusts as they are considered U.S. citizens for the purposes of determining whether the covered expatriate transferring assets by gift or bequest to such trusts applies. Therefore, gifts to a grandchild’s trust in the U.S. by a covered expatriate would implicate reporting obligations and tax on the trust.
• Non-Electing Foreign Trusts: Trusts that are non-electing foreign trusts are not considered U.S. citizens subject to the reporting requirement for transfers by gift or bequest from covered expatriates. However, beneficiaries receiving the assets attributed to the transfers by the covered expatriate will be subject to tax.

In addition to other factors, compliance and tax exposure for transfers from covered expatriates should be considered in structuring trusts and making elections.

Section 2801: Planning Considerations To Prevent Penalties

Regulations under Section 2801 were passed nearly seventeen years after the statute and the scope of some provisions, especially their retroactive applicability remains uncertain. To prevent cumbersome audit issues and potential noncompliance complications, it is prudent to consider:

• Timely Estate Planning: Engage in a comprehensive asset protection planning aligned with broader estate and gift tax planning before expatriation to minimize potential tax exposure for U.S. heirs. Consider that the income tax on covered expatriates applies on the gains in assets computed as a deemed transfer on the date of expatriation. However, note that having greater than the $2 million threshold would trigger covered expatriate rules for estate and gift purposes even if all assets were cash or other liquid assets.
• Domestic and Foreign Trust Structuring: Evaluate and amend or structure trusts carefully to align with prospective tax obligations including making appropriate elections to mitigate tax liabilities and compliance burdens on recipients and for the estate of covered expatriates.
• Seek Professional Guidance: Expatriation rules and their application are specific to each individual circumstance and it is critical to ensure that all tax exposure and liabilities are considered before expatriation, during any appliable tax periods, and for any transfers where covered expatriate rules may apply. Merely considering income tax consequences is insufficient and guidance from professionals adept at planning for expatriates with substantial knowledge of income, estates, and gift taxes along with international tax treaties can be significantly beneficial.

Continued increase in expatriation makes consideration of the broader tax implications and application of covered expatriate rules significant. Celebrities and public figures face additional challenges in terms of asset location and valuation because of rights of publicity (name, likeness, and image rights) which may be deemed to be located in the U.S. even though all their assets are abroad. These issues also arise with other intangibles such as cryptocurrency, artificial intelligence, and technology. Careful asset protection and planning well before any expatriation can be critical to avoid unexpected surprises.