U.S. Estate Tax Follows Expatriates Under Section 2801

Forbes

01-06-2025

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Tina Turner (Photo by Blick/RDB/ullstein bild via Getty Images)
ina Turner's death in May 2023 sparked an interesting consideration for the estates of expatriates. She relinquished her citizenship in late 2013, approximately ten years before her death and resided in Switzerland at her death. Despite being a noncitizen of the U.S. at her death, Turner may have been subject to U.S. income and estate taxes depending upon whether she was considered a covered expatriate and whether she had assets that would be considered U.S. assets taxable in her estate. The impact of the estate tax could deplete 40% of the assets subject to tax at her death. Given her substantial wealth, it is likely that she engaged in significant planning that minimized or eliminated any tax exposure regardless. However, if she had made transfers either during her lifetime or at death to any U.S. beneficiaries, significant tax compliance and payment obligations could have resulted for both the beneficiaries and her estate. The following is a brief overview and some of the common considerations for expatriates in similar situations where they may not consider having the U.S. tax system apply even where they have no direct investments in the U.S.
IRC Section 2801 imposes a tax on U.S. citizens or residents on the receipt of "covered gifts" or "covered bequests" from individuals who fall within the definition of a covered expatriates. The tax is imposed on all transfers, whether during the expatriate's lifetime or at death, as an estate tax.
The law provides that the individual would be a covered expatriate if any of the following apply: (1) Had an average annual net income tax liability exceeding a specified threshold aligned with an inflation adjusted amount for five years preceding the date of expatriation, (2) Had a combined net worth of $2 million or more on all assets globally on the date of expatriation, or (3) Was noncompliant with U.S. tax obligations for five years preceding expatriation. Tax obligations extend beyond income tax to certain excise taxes as well that may be considered with personal income tax obligations. Section 2801 imposes the highest estate tax rate in effect at the time of the gift or bequest. This rate is currently 40%.
In January 2025, the U.S. Congress issued final regulations on the taxation of gifts and bequests from covered expatriates. These regulations introduced the filing of a new Form 708 to report these transfers. Form 708 must be filed by U.S. recipients of covered gifts or bequests by the 15th day of the 18th month following the end of the year in which they received the covered gifts or bequests. Noncompliance subjects the recipients to significant penalties.
The trust classification controls whether transfers made to trusts by covered expatriates fall within the purview of the reporting requirements and tax:
In addition to other factors, compliance and tax exposure for transfers from covered expatriates should be considered in structuring trusts and making elections.
Regulations under Section 2801 were passed nearly seventeen years after the statute and the scope of some provisions, especially their retroactive applicability remains uncertain. To prevent cumbersome audit issues and potential noncompliance complications, it is prudent to consider:
Continued increase in expatriation makes consideration of the broader tax implications and application of covered expatriate rules significant. Celebrities and public figures face additional challenges in terms of asset location and valuation because of rights of publicity (name, likeness, and image rights) which may be deemed to be located in the U.S. even though all their assets are abroad. These issues also arise with other intangibles such as cryptocurrency, artificial intelligence, and technology. Careful asset protection and planning well before any expatriation can be critical to avoid unexpected surprises.