proposed regulations to give guidance under section 2801 of the US tax code that imposes a tax (at the highest applicable gift or estate tax rates) on US residents and citizens receiving gifts and bequests from expatriates.
The number of people giving up their U.S. citizenship has accelerated in recent years, in part due to the Foreign Account Tax Compliance Act (FATCA). As we previously posted "It Must Be The Time To Expatriate?" where we discussed that the list of recent US expatriates’ is a diverse: one of the world’s greatest soul singers; a best-selling author, a professional basketball player, architects, artists, lawyers, retirees and financiers. The register of individuals who have “chosen to expatriate”, as the US puts it, shows an increase in the number of Americans who are renouncing their US citizenship or turning in their green card.
These newly issued proposed regulations relate to the 2008 Heroes Earnings Assistance and Relief Tax Act (HEART Act) which introduced two new sections to the Tax Code, 877A and 2801. Section 877A imposed an exit tax on such individuals and the Treasury and the IRS released guidance in 2009 for Section 877A. However until now, the Treasury and the IRS had not issued guidance for Section 2801. Before these proposed regulations there have been no forms or means to comply or report the tax consequences of any of these transactions.
As provided for in the HEART Act, the regulations impose a gift and/or estate tax on gifts or bequests received from "covered expatriates" who relinquished US citizenship or ceased to be lawful permanent residents of the United States on or after June 17, 2008.
"Covered expatriate" is defined as an individual who expatriated on or after that date, and who, on the expatriation date, had an average annual net income tax liability greater than USD124,000 (indexed for inflation) for the previous five taxable years, had a net worth of at least USD2m (not indexed), or had failed to certify that he or she had complied with all US tax obligations for the five preceding taxable years.
The tax will be payable by US residents and citizens who receive gifts or bequests from such individuals, but is reduced by any estate or gift tax paid to a foreign jurisdiction. For the purposes of section 2801, domestic trusts and foreign trusts electing to be treated as domestic trusts are treated as US citizens.
In addition, section 2801 tax applies with regard to any property transferred to a US citizen or resident which qualifies as a gift or bequest, regardless of whether the property transferred was acquired by the donor or decedent covered expatriate before or after expatriation. Its value is its fair market value at the time the gift or bequest is received.
However, a gift or bequest to a covered expatriate's US citizen spouse is excepted from the provisions of section 2801, if such a gift or bequest would, if given by a US citizen or resident, qualify for the US gift or estate tax marital deduction. Charitable donations that would qualify for the US gift or gift tax charitable deduction are also excepted.
One area that could is still uncertain is how section 2801applies to life insurance. Someone who is a covered expat could buy a life insurance policy, be that term or variable, have some type of insurance payment go to a US residents and citizens and that probably would not be included as a covered gift or bequest from such individuals.
However, the proposed regulations do mention that life insurance proceeds payable upon the covered expatriate’s death that would have been includible in the covered expatriate’s gross estate under section 2042 if the covered expatriate had been a U.S. citizen at the time of death.
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