New year, new tax, new form – Tax on “Covered Gifts and Bequests” and Form 708 U.S. Return of Gifts or Bequests from Covered Expatriates (form not yet released)

Our 10-year wait is over. The IRS just finalized Section 2801 regulations from the proposed rules published in September of 2015.  Currently, we are still waiting for the IRS to release the new Form 708 U.S. Return of Gifts or Bequests from Covered Expatriates.

What is the section 2801 tax on Gifts or Bequests from Covered Expatriates?

In 2008, Congress passed the HEART Act which included a new federal tax on certain gifts and inheritances a U.S. citizen or resident (“U.S. person”) received from “covered expatriates.” “Covered expatriates” are individuals who have relinquished their U.S. citizenship or long-term permanent residency in the U.S. who met annual net income tax thresholds for 5 years before expatriation, net worth $2 million or more, or failed to certify U.S. tax obligations on Form 8854 as required. See more details on “covered expatriates” on the IRS website.

The section 2801 tax is imposed when a U.S. person receives certain gifts or bequests from “covered expatriates.” While the law imposing this tax was enacted nearly 17 years ago, the IRS released the final regulations on January 14, 2025.

Who is subject to the section 2801 tax, how is the tax calculated?

This new tax on gifts or bequests from certain former U.S. citizens or former green card holders (“covered expatriates”) applies at the maximum estate and gift tax rate (currently 40%). Recipients are only allowed an annual exemption equal to the gift tax annual exclusion ($19,000 for 2025) to reduce the taxable amount of applicable gifts or bequests.

The section 2801 tax mechanism does not offer an exemption like a lifetime exemption for the estate or gift tax for U.S. domestic taxpayers ($13.99 million for 2025). The section 2801 tax calculation itself is simple: 40% of the excess of the covered gift/bequest value over the annual gift tax exclusion.

Example. Mom relinquishes her U.S. citizenship and now lives in a foreign country. In 2025, Mom gifts $519,000 to her daughter, who is a U.S. citizen. Mom’s daughter’s section 2801 tax liability is $200,000 (40% of the excess of $519,000 over $19,000).

Note, this section 2801 tax is imposed on the gift recipient, not the donor, unlike the U.S. domestic gift tax as filed and paid on Form 709.

What assets are “covered gifts” and “covered bequests,” subject to the section 2801 tax?

Section 2801 tax applies to existing and all non-U.S. situs assets acquired by the covered expatriate, including assets acquired after the expatriation event.

A “covered gift” or a “covered bequest” is any asset acquired by a U.S. citizen or resident directly or indirectly by gift from a “covered expatriate” or by reason of death of a “covered expatriate.”

Exceptions to the section 2801 tax

There are some exceptions to the section 2801 tax, including:

·       Taxable Gifts and Bequests, if reported by a covered expatriate on a timely filed U.S. gift or estate tax return as applicable, with any gift or estate tax due timely paid.

·       Disclaimers and Charitable Donations: A qualified disclaimer made by a covered expatriate. Charitable donations that would qualify for the estate or gift tax charitable deduction also are exceptions and do not constitute covered gifts or bequests.

·       Transfers to a spouse. A gift or bequest to a covered expatriate’s spouse who is a U.S. citizen or resident. Also a gift or bequest in trust qualifying for the estate or gift tax marital deduction as a qualified terminable interest property (“QTIP”) trust or a qualified domestic trust (“QDOT”).

*but a spouse who is a resident but not a U.S. citizen is subject to a lower annual gift limit (rather than unlimited), which is $100,000 adjusted for inflation. The limit for 2025 is $190,000. Section 2801 will be applied for such gifts (in excess of the lower limit) to a resident spouse who is not a US citizen. Check out the blog on gifting to a non-U.S. citizen spouse.

How about gifts or bequests from a “covered expatriate” to a trust?

In the case of a trust, the critical first step is to know whether the trust is a U.S. trust or a foreign trust. The determination will be discussed in a separate blog. Depending on such classification, the section 2801 tax is applied differently.

U.S. domestic trust:  if a covered expatriate’s assets are transferred by a gift or bequest to a U.S. domestic trust, the trust is subject to the section 2801 tax in the same manner as an U.S. citizen recipient.

Foreign trust: a foreign trust that receives a covered gift or covered bequest is not liable for the payment of the section 2801 tax, unless it elects to be treated as domestic trust (“electing foreign trust”). Each U.S. beneficiary is liable for payment of Inheritance Tax upon receipt, either directly or indirectly, of any distribution from the foreign trust, attributable to a covered gift or covered bequest made to the foreign trust.

Any effects of estate and gift tax treaties on the section 2801 tax?

The final regulations note that neither the statutory language nor the legislative history of section 2801 indicates Congressional intent concerning the effect of existing estate and gift treaties on the section 2801 tax. The effect of a particular treaty on the application of section 2801 to a gift or bequest by a covered expatriate in a treaty country must be evaluated on a case-by-case basis when a particular transfer falls within the reach of both section 2801 and an estate or gift tax treaty.

The U.S. currently has estate and gift tax treaties with Australia, Austria, Denmark, France, Germany, Japan, and the United Kingdom and estate tax-only treaties with Finland, Greece, Ireland, Italy, the Netherlands, South Africa, and Switzerland. There are also estate tax provisions in the U.S.-Canada income tax treaty.

Plan carefully before expatriation, and before immigration  (to the U.S.)

Since the lifetime exemption for gifts and estate tax for a U.S. person is significantly high ($13.99 million for 2025), tax-free gifting prior to expatriation should be evaluated. There are other strategies, such as optimizing annual gift exclusion, utilizing gifting through discounts and marital and charitable deductions, using irrevocable life insurance trusts (ILITs), etc.

Conversely, foreign persons who plan to become a U.S. citizen or resident also should evaluate the impact of the 2801 tax.

The web of the U.S. international taxation is complex, but must be navigated before major moves to and from the U.S. for your asset protection and financial planning. Consult with a qualified international tax professional can help you minimize your tax burden, ensure compliance, and maximize your global opportunities. Don't let the complexities of international taxation derail your international ventures. Contact us today to begin your journey.