New Rules on Gifts & Inheritances from Expats Proposed by the IRS

We know that increasing globalization keeps us, Enrolled Agents, on our toes especially when we have to consider advising families, businesses and real property owners who have ties with the US and other countries as well. Thanks to my many clients who have business interests in other countries or still have ties/ families back in the countries they migrated from, I deal with cross-border issues quite often.  

Interestingly, this summer we did a work-up for a client who had surrendered their green-card & left the country but due to their length of stay in the country, they could be considered "covered-expatriates", the clients wanted to set up inheritances for their grand-children who are US citizens.

Under the estate and gift tax rules, a foreign person can make a gift to somebody in the U.S., and there is no gift tax as long as it’s not a U.S.-sited asset. There’s no tax consequence to the recipient. If the value of the gift is over $100,000, they need to file a 3520, but there’s no tax consequence. If you inherit property from a foreign person, and the value is over $100,000, you file a 3520, but there’s no tax consequence. You may have an 8938 filing obligation because an interest in a foreign estate is a reportable asset, but one doesn't have to do anything more.

Back in the day, before the "HEART" Act {Heroes Earnings Assistance and Relief Tax Act} of 2008, citizens and long-term residents of the US, who had expatriated to avoid US taxes, were subject to US income, estate and gift taxes under Code § 877, §2107 and §2501 respectively for 10 years after expatriation. 

§ 877A(g)(1)(A) states what a "covered expatriate is" and it is usually based on net worth on the date of expatriation or income for five years prior to expatriation. Details here in Notice 2009-85

§ 877A was introduced along with it's companion, § 2801 by the "HEART Act". Guidance had been issued by the IRS for the 877A in 2009 but there was nothing on the 2801 until now. 

What is this new component of § 2801? This new component { Prop. Reg. 28.2801-1} says that US taxpayers who receive gifts & inheritances from people who had previously expatriated are subject to  gift and/or estate taxes on the receipt of such gift or bequest. This tax is imposed on US Citizens who receive, directly or indirectly, "covered" gifts or "covered" bequests from a "covered" expatriate. 

Exceptions Applicable to Covered Gifts and Covered Bequests:  
Yes, there are exceptions. These include 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 such expatriate's timely filed estate tax return, provided that the gift or estate tax due is timely paid.

Your Responsibility if these rules were to apply to you: 
First, if you think these rules apply to you, you should consult an Enrolled Agent/ Tax Attorney/ a qualified CPA right away. They would need to determine under the proposed guidance if tax under Code Sec. 2801 is due. Under these proposed regulations, the burden is on the US Citizen/ resident to determine if the expatriate was a "covered expatriate" and hence, the gift or bequest is a "covered gift" or "covered bequest". 

Form 708 would be the new form for the calculation of tax due under § 2801. The form has not been issued yet. 

As always, read my disclaimer here. Please consult a qualified tax professional for your unique tax needs. More of my contact information is on my website,


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