The IRS has issued final regulations (TD 10027) on applying the tax under IRC Section 2801 to gifts or bequests that US citizens or residents, as well as certain trusts, receive from January 1, 2025, onwards from covered expatriates. TD 10027 also includes guidance on reporting and paying the tax. The final regulations adopt, with modifications, the proposed regulations (REG-112991-10) published in the Federal Register on September 10, 2015.

Final regulations

Overview

IRC Section 2801 was enacted under the HEART Act, effective June 17, 2008, with the stated purpose of making the act of expatriation "tax neutral" for gift and estate tax, meaning certain categories of expatriating US citizens and long-term green card holders should not escape US estate and gift tax. The legislation called for the imposition of the tax, payable by the US recipient, on receipts of certain gifts (covered gifts) and bequests (covered bequests) from "covered expatriates." Enforcement of the IRC Section 2801 tax regime was suspended until the IRS issued final enabling regulations, which the IRS has now done. According to the regulations, the tax applies to covered gifts and bequests received from January 1, 2025, onwards; it was possible for the regulations to have positioned the IRS to collect IRC Section 2801 tax retroactively to 2008, but the final regulations did not implement retroactive collection.

Under the final regulations, the burden is on the US recipient to (1) know whether the transferor is a covered expatriate, (2) know whether the transfers are covered gifts or bequests, and (3) report the transfers and pay the tax (with exceptions). Knowing whether a transferor is a "covered expatriate," from 2008 forward, is a major challenge for a recipient, and has (1) called into question the "administration" of this IRC Section 2801 tax, and (2) largely contributed to why it has taken 17 years to issue the final regulations.

Definitions

The IRC Section 2801 tax applies to the "US recipient" who receives a "covered gift" or "covered bequest" from "covered expatriates."

A "US recipient" includes a US citizen or resident, a domestic trust, or an "electing foreign trust." Residency for purposes of the IRC Section 2801 tax refers to residency of the recipient for estate or gift tax purposes, rather than for income tax purposes. Residency for US gift or estate tax purposes is based on domicile, defined as living in the United States, for even a brief time, with no definite present intention of later leaving. An "electing foreign trust" is a foreign trust that has in effect a valid election to be treated as a domestic trust for purposes of IRC Section 2801. A "non-electing foreign trust" is any other foreign trust.

The final regulations define "covered gift" as property, regardless of situs, that a recipient acquires by gift, directly or indirectly, from a covered expatriate, and "covered bequest" as property acquired directly or indirectly because of the death of a covered expatriate. Covered bequests only include property that would have been included in the covered expatriate's gross estate for federal estate tax purposes if the decedent had been a US citizen immediately before death. Covered gifts and covered bequests include distributions made from a non-electing foreign trust to the extent the distributions are attributable to covered gifts and covered bequests made to the trust after the enactment of the HEART Act. The final regulations also confirm that the exercise, release or lapse of a covered expatriate's general power of appointment for the benefit of a US citizen or resident is a covered gift or bequest.

An "expatriate" is a US citizen who relinquishes citizenship, or a green card holder for any part of any eight of the past 15 years who ceases to be a US lawful permanent resident. A "covered expatriate" is an expatriate who meets any one of these three tests:

• Annual tax test: average annual net income tax exceeding $206,000 (2025, indexed for inflation) for five-year period ending before the expatriation date
• Net worth test: net worth of $2 million or more on the expatriation date; includes all worldwide assets (e.g., securities, homes, bank accounts) and interests in certain trusts
• Compliance certification test: failure to certify on Form 8854 that the expatriate has met all US tax obligations for prior five years

Under the final regulations, a covered expatriate will remain such for purposes of IRC Section 2801 at all times after the expatriation date, except for periods during which the individual is subject to US estate or gift tax as a US citizen or resident.

The final regulations apply only to covered gifts or covered bequests received on or after January 1, 2025. However, an individual's covered expatriate status is relevant from June 17, 2008.

Implications

The final regulations largely adopt the provisions outlined in the definitions section of the proposed regulations. Significantly, though, it appears that the final regulations apply only to covered gifts and bequests received by US recipients on or after January 1, 2025. Previously, it was expected that the 2801 tax would apply retroactively to tax covered gifts/bequests received by a US person since 2008. However, covered gifts/bequests to a foreign trust and certain incomplete gift domestic trusts that were made on or after June 17, 2008 are generally within the scope of the IRC Section 2801 tax when ultimately distributed after January 1, 2025 to a US person or upon completion of the gift to the trust (e.g., for a revocable trust, where the settlor dies or otherwise relinquishes the revocation right).

Rules applicable to covered gifts and covered bequests

In defining a "covered gift," the final regulations incorporate the standard definition of a gift under general gift tax principles, but disregard the statutory exceptions for (1) transfers of intangible property by nonresident aliens (NRAs), (2) transfers to political organizations, (3) transfers of certain stock in a foreign corporation, (4) the gift tax annual exclusion, (5) educational and medical expenses, and (6) the waiver of certain pension rights.

The final regulations exclude gifts that are properly reported on a timely filed US gift tax return from the definition of covered gift. The final regulations also exclude property included in the covered expatriate's gross estate and properly reported on a timely filed US estate tax return from the definition of covered bequests.

To prevent the same property from being subject to the IRC Section 2801 tax first as a covered gift and then later as a covered bequest, the final regulations limit the value of a later covered bequest to the amount that exceeds the earlier covered gift value, which was previously taxed under IRC Section 2801.

The final regulations also exclude the following items from the definitions of covered gift and bequest:

• Certain gifts and bequests to spouses:
• A gift or bequest to a spouse that would qualify for the marital deduction under IRC Section 2056 or 2523 if the donor or decedent were a US person
• A gift or bequest of a partial or terminable interest in property that a covered expatriate makes to his or her spouse only to the extent that the gift or bequest is qualified terminable interest property (QTIP) (as defined in IRC Sections 2523(f) and 2056(b)(7)) and a valid QTIP election is made
• A bequest from a covered expatriate to his or her non-US citizen surviving spouse who is a US resident to the extent the bequest is made to a qualified domestic trust (QDOT) (as defined in IRC Section 2056A) and a valid QDOT election is made
• Charitable donations that qualify for the estate or gift tax charitable deduction
• The charitable remainder interest of a charitable remainder trust
• Qualified disclaimers (as defined in IRC Section 2518) of property made by a covered expatriate

Calculation of IRC Section 2801 tax

The final regulations adopt the proposed regulations' calculation and reporting provisions on new IRS Form 708, United States Return of Tax for Gifts and Bequests Received from Covered Expatriates. A US recipient calculates the IRC Section 2801 tax liability by reducing the total amount of covered gifts and bequests received during the calendar year by the dollar amount for the per-donee exclusion in effect ($19,000 for 2025) and multiplying the resulting amount by the highest estate or gift tax rate in effect during the calendar year (currently 40%). The resulting figure is then reduced by any estate or gift tax paid to a foreign country on the covered gifts or bequests. The US recipient may file a protective claim for refund if the recipient anticipates owing foreign taxes that could ultimately affect their IRC Section 2801 tax liability.

Liability for IRC Section 2801 tax

A US citizen or resident, or a domestic trust (including an "electing foreign trust") that receives a covered gift or bequest, is liable for payment of the IRC Section 2801 tax. A trust's payment of the IRC Section 2801 tax does not result in a taxable distribution to any trust beneficiary for purposes of the generation-skipping transfer (GST) tax to the extent that the trust, rather than the beneficiary, is liable for the IRC Section 2801 tax.

Taxpayers determine the date a gift is received under the general gift tax provisions. A bequest is received on the date of distribution from the estate or trust, rather than the date of the covered expatriate's death. The date on which a US recipient indirectly receives a covered gift through an intermediary is the date it was received by the first US person subject to IRC Section 2801.

Implications

US recipients must be vigilant in determining their liability and the timing of the IRC Section 2801 tax. This can be particularly challenging for beneficiaries receiving distributions from trusts and foreign estates. Disconnects are likely where the trustee may not have insight into the covered expatriate status of the settlor or decedent. As a result, US recipients may be left in a challenging position regarding their personal tax liability related to IRC Section 2801.

Foreign trusts

US recipients receiving distributions of income (current year or accumulated) or principal from non-electing foreign trusts are liable for the IRC Section 2801 tax on the distribution to the extent it is attributable to a covered gift or bequest. It may be unclear whether contributions to a non-electing foreign trust since June 17, 2008, are attributable to a covered gift/bequest. The final regulations provide an inclusion ratio calculation to determine the portion of a distribution that is subject to the IRC Section 2801 tax.

The final regulations allow the US recipient to deduct against income the IRC Section 2801 tax paid or accrued, in the year the tax is paid or accrued. For distributions of accumulated income from a foreign nongrantor trust, the US recipient will continue to be subject to the "throwback tax" under IRC Section 668.

A non-electing foreign trust that domesticates to become a US trust (unrelated to making an electing foreign trust election) has the same IRC Section 2801 tax filing and payment requirements as a US recipient.

In certain circumstances, a foreign trust might elect to be treated as a domestic trust for purposes of the IRC Section 2801 tax. The final regulations provide procedures for making the election and detailed rules regarding maintenance and termination of the election.

Implications

US beneficiaries of foreign trusts and certain incomplete gift domestic trusts that may be settled by covered expatriates, as well as US beneficiaries of estates of covered expatriates, may want to consider having a discussion with the trustees or fiduciaries of the trusts and estates about the information needed to file Form 708 and pay the applicable IRC Section 2801 tax. It is possible that the trustees may not have definitive information on covered expatriate status of the settlor or decedent, and therefore, the US beneficiaries will need to weigh their filing approaches and liability risk. US beneficiaries who have been receiving ongoing distributions from non-electing foreign trusts and certain incomplete gift domestic trusts may want to evaluate the financial impact of future distributions.

Determining responsibility under IRC Section 2801 and protective returns

The final regulations require the US recipients who receive gifts or bequests from expatriates, or distributions from foreign trusts funded by expatriates, to determine their obligations under IRC Section 2801. Specifically, they are required to ascertain whether the transferor is a covered expatriate and whether the transfer is a covered gift or covered bequest. The IRS may disclose return information of the donor or decedent expatriate to assist the US recipients in determining the status of the donor or decedent as a covered expatriate and the nature of the transfer. The procedure for requesting this information, however, has not yet been published; the IRS notes that privacy rules may impact its ability to provide the information. In any event, US recipients cannot rely on this information from the IRS if they know or have reason to know that it is incorrect or incomplete. Furthermore, if living donor expatriates do not authorize the disclosure of their relevant return or return information, there is a rebuttable presumption that the donor is a covered expatriate, and the gift is a covered gift.

The final regulations allow a US recipient to file a protective Form 708 to begin the statute of limitations for the IRC Section 2801 tax if they reasonably conclude that a gift or bequest is not a covered gift or bequest. This protective return must (1) be signed under penalties of perjury, (2) set out the basis on which the US recipient reached the conclusion, and (3) include a copy of Part III of Form 3520, Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts, reflecting the gift or bequest.

Implications

Even in the most connected and clear situations, it is challenging for US recipients to ascertain whether the transferor is a covered expatriate and whether the transfer is a covered gift or covered bequest. While the IRS publishes quarterly lists of expatriates, there is no true list published of "covered expatriates." If a taxpayer has reasonable grounds for determining that the transferor is not a covered expatriate, or that the transfer is not a covered gift or bequest, the US recipient might consider filing a protective Form 708 to avoid possible penalties and to begin the statute of limitations. The protective filing, however, has disadvantages, including the cost to prepare and whether the taxpayer can truly prove the transferor is a noncovered expatriate.

Other provisions

The proposed regulations contain rules for:

• Valuing covered gifts and bequests
• Determining when a covered gift or bequest is received
• Determining whether the tax under IRC Section 2801 is due

Overall implications

While the final regulations are comprehensive, it is still unclear how a taxpayer can practically identify the covered expatriate status of a donor, decedent or trust settlor. Additionally, the IRC Section 2801 tax is anticipated to apply narrowly to 1,000 persons a year; however, the burden on a taxpayer to prove noncovered expatriate status is an enormous risk, as taxpayers may find it difficult to access the necessary information to verify whether IRC Section 2801 will apply. Taxpayers who receive gifts and bequests, especially if they must report those gifts or bequests in Part IV of Form 3520, may want to consider proactively collecting information to prove the donor was not a covered expatriate. If the donor is or was indeed a covered expatriate, taxpayers should be prepared to file Form 708 and pay the applicable IRC Section 2801 tax on the transfer. If the transfer is from a foreign nongrantor trust or a foreign estate, taxpayers should consider collaborating with the trustee/executor to obtain enough information for determining whether IRC Section 2801 tax is due. Taxpayers may want to inquire about any foreign estate or gift taxes paid on transfers to reduce their IRC Section 2801 tax liability. Taxpayers may consider filing protective Forms 708 to mitigate the application of potential penalties and to start the statute of limitations.