I've written before about American citizens giving up
citizenship, and green-card holders giving up that status. I've
done it in my
blog, and also in a
full-length article for the Canadian Tax Foundation.
Some of the people in this category, who exited after June 16,
2008, will be "covered expatriates". There are some
unpleasant tax consequences for these individuals. And remember,
once you're a covered expatriate, you're one forever
(assuming you don't return to live in the United States).
One of these consequences is that transfers made to Americans
(US citizens and tax residents) are subject to an excise tax of
40%. Writ large, a transfer is a lifetime gift or a bequest on
death. Since the expatriate is no longer subject to US
jurisdiction, it is the recipient who is subject to the
The expatriation rules were legislated in 2008 as part of the HEROES
Act. But it is taking a long time for the regulations to be put
in place. Well, the Department of the Treasury has finally proposed regulations on this item just now
(September 10, 2015). It plans a public hearing in January, and
comments afterwards. Eventually, we will see final regulations
(these new rules are not applicable until then).
Covered gifts and bequests
The rule imposes tax, at the highest estate tax rate (currently
40%), on a US person who receives a "covered" gift or
bequest. These definitions cover direct and indirect transfers. Not
surprisingly, transfers made by way of a trust are caught:
When the American receives a distribution from a foreign (non-US)
trust designed to pass on these funds, he is subject to this tax in
the same way as if he received the transfer directly.
A foreign trust can make an election to be treated as a US
domestic trust solely for this purpose, and then the tax is applied
on the transfer into it, instead of payments out of it. Sometimes
the certainty and convenience are desirable. It may also be
beneficial if the value of the underlying assets is expected to
Where the covered expatriate controls (has a "general power
of appointment" over) property in a trust, and the beneficiary
is a US person, the exercise, release or lapse of that power is
considered a covered gift or bequest.
There is an exclusion for the first US$14,000 per year (indexed
for inflation). This is the same de minimis rule that
applies to ordinary gifts among US persons, or to US-situs gifts
made by non-Americans.
Transfers covered by ordinary US gift or estate tax are
excluded, but they have to be reported on a timely filed gift or
estate tax return. If a covered expatriate transferred US real
property, for instance, then it would fall into this category.
There are some more technical exceptions, such as
"qualified disclaimers" (where the covered expatriate
refuses to accept property transferred to him by someone else) and
A Qualified Terminable Interest in Property ("QTIP")
trust is one where the income beneficiary does not get the capital
portion of the trust. A typical QTIP trust is one created by a
husband upon his death. The wife is entitled to all the income from
the trust during her lifetime, but the capital goes to their
If, in this case, the husband is a covered expatriate, and the
wife is a US citizen, and the trust is (or makes an
election to be treated as) a US trust, then then the transfer will
be exempt from the special tax. When the wife dies, her estate will
be subject to the ordinary estate tax, but here there is a US$5.43M
A US person must report transfers received from non-US persons
on form 3520. This requirement has been in place for some time. The
penalty for failure to report a gift (over the threshold, which is
usually $100,000), is as much as 25% of the transfer.
There will be cases where a recipient will not know whether the
transferor was previously a US person (remember, he's not one
at the time of the transfer). The form asks for the
transferor's US tax identification number. How is the recipient
to know to ask? If the transferor is a decedent that relinquished
citizenship decades earlier, it is reasonably likely that nobody
will know. In some cases, proper reporting is a practical
The IRS will issue a new form 708, once these proposed
regulations are finalized. At that point, taxpayers will be given
some time to file to report these transfers (yes, going back to
June 17, 2008). No interest will not be charged until that due
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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