New Tax on Expatriates' Gifts and Bequests Gets Prop. Regs.: The Highest Gift or Estate Tax Rate Applies after the Gift Tax Annual Exclusion Amount; the Marital Deduction and QTIPs Are among the Possible Exclusions

By Schreiber, Sally P. | Journal of Accountancy, December 2015 | Go to article overview

New Tax on Expatriates' Gifts and Bequests Gets Prop. Regs.: The Highest Gift or Estate Tax Rate Applies after the Gift Tax Annual Exclusion Amount; the Marital Deduction and QTIPs Are among the Possible Exclusions


Schreiber, Sally P., Journal of Accountancy


Taxpayers who receive gifts or bequests from certain individuals who gave up their U.S. citizenship or residency will be subject to tax under rules the IRS proposed in September. The proposed regulations implement Sec. 2801, which was added to the Code in 2008 by the Heroes Earnings Assistance and Relief Tax Act of 2008, P.L. 110-245, to tax "covered gifts" and "covered bequests" a U.S. citizen or resident receives from a "covered expatriate" on or after June 17, 2008.

Sec. 2801 imposes a tax at the highest applicable gift or estate tax rates on any U.S. citizen or resident who receives a covered gift or bequest. "Covered gift" means any property acquired by gift directly or indirectly from an individual who is a covered expatriate at the time the property is received by a U.S. citizen or resident, regardless of its situs and of whether such property was acquired by the covered expatriate before or after expatriation from the United States. A covered bequest, however, is defined as any property acquired directly or indirectly because of the death of a covered expatriate, generally, property that would have been includible in the covered expatriate's gross estate had he or she been a U.S. citizen or resident at death.

Under the proposed regulations, if an expatriate meets the covered expatriate definition in Sec. 877A(g), he or she is considered a covered expatriate for Sec. 2801 purposes at all times after the expatriation date, except during any period beginning after that date during which he or she is subject to U.S. estate or gift tax as a U.S. citizen or resident.

Exceptions: Taxable gifts reported on a covered expatriate's timely filed gift tax return and property included in the covered expatriate's gross estate and reported on the expatriate's timely filed estate tax return are exempt from the Sec. 2801 tax if the gift or estate tax is timely paid. A covered expatriate's qualified disclaimers of property are excluded, as are charitable donations that qualify as estate or gift tax charitable deductions.

Prop. Regs. Sec. 28.2801-3(c)(4) excludes a gift or bequest to a covered expatriate's U.S. citizen spouse if the gift or bequest, had it been from a U.S. citizen or resident, would qualify for the gift or estate tax marital deduction. For a gift or bequest in trust, this means that, to the extent the gift or bequest to the trust (or to a separate share of the trust) would qualify for the estate or gift tax marital deduction, the gift or bequest is not a covered gift or covered bequest.

A gift or bequest of a partial or terminable interest in property made to a covered expatriate's spouse is excepted from the tax only to the extent it is qualified terminable interest property (QTIP) under Sec. 2523(f) or 2056(b)(7) and a valid QTIP election is made. …

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