On Jan. 14, 2025, the Inside Income Service not too long ago issued closing rules (closing regs) imposing a tax on U.S. residents, residents and sure trusts that obtain items or bequests from sure people who’ve expatriated from the USA. The ultimate regs solely apply to coated items or bequests obtained on or after Jan. 1, 2025. It was beforehand anticipated that the ultimate regs would apply to all transfers made when the proposed rules (proposed regs) had been initially disseminated in 2015.
The ultimate regs had been issued to implement the Heroes Earnings Help and Reduction Tax Act of 2008 (HEART Act), which enacted a brand new market-to-market tax (Inside Income Code Part 877A) for expatriating people and a brand new switch tax (IRC Part 2801) for sure transfers from people who had expatriated to the IRC. The tax was to topic transferred belongings to tax in an analogous method to the switch tax due if the coated expatriate had been nonetheless a U.S. citizen or everlasting resident (U.S. particular person) on the time of the switch. Nonetheless, within the preamble to the ultimate regs, which had been issued 10 years after the proposed regs, the Treasury concedes that the tax imposed by Part 2801 “doesn’t equal, and in some instances just isn’t much like, the tax that will have been imposed on the switch of such items or bequests by a U.S. transferor” Within the Treasury Choice that accommodates the ultimate regs.
Coated Expatriates
The Part 2801 tax is imposed on sure transfers made by “coated expatriates” who expatriated on or after June 17, 2008. Beneath Treasury Laws Part 28.2801-2(h), a coated expatriate is an individual who was a U.S. particular person and gave up such citizenship or residency and (1) has a mean annual web earnings tax legal responsibility for the 5 years previous expatriation above $206,000 (2025 worth listed for inflation), or (2) has a web value of $2 million or extra on the time of expatriation, or (3) fails to certify underneath penalties of perjury that each one U.S. federal tax obligations for the 5 years previous expatriation have been complied with. The tax is imposed on the receipt of property obtained immediately or not directly from a coated expatriate by advantage of the demise of the coated expatriate (coated bequest) or as a present from the coated expatriate, whatever the situs of the gifted asset (coated reward). (I’ll confer with coated bequests and coated items as “coated transfers.”) If the recipient of a coated switch is a belief and the belief is both a home belief or a international belief that elects to be handled as a home belief for the needs of Part 2801, the belief pays the Part 2801 tax. If the belief is a international belief that doesn’t elect to be handled as a home belief (non-electing belief), the beneficiary who receives the coated switch from the belief pays the Part 2801 tax when the coated switch is distributed from the belief to the beneficiary.
Who Pays the Tax?
The Part 2801 tax is imposed on the recipient of a coated switch that exceeds the per-donee annual reward tax exclusion quantity (in 2025, that means a present that exceeds $19,000), and the tax on the coated switch is the same as such extra multiplied by the very best property tax charge (at the moment 40%), decreased by property or reward tax paid to a international nation on mentioned switch. The Part 2801 tax needs to be reported and computed on Kind 708, which the IRS hasn’t but issued.
Six Essential Clarifications
Whereas nearly all of the ultimate regs associated to Part 2801 don’t differ considerably from the proposed regs, the ultimate regs comprise essential clarifications that can influence when advising recipients of such coated transfers:
- The definition of a U.S. resident within the proposed regs was an earnings tax definition, whereas within the closing regs, the time period U.S. resident makes use of the switch tax definition.
- The proposed regs outlined a coated bequest as any property acquired attributable to a coated expatriate’s demise, whether or not such property was acquired immediately or not directly. The ultimate regs restrict this definition to incorporate solely three classes of coated bequests: (1) property acquired or obtained by a recipient on or after June 17, 2008 that will have been included within the coated expatriate’s taxable property had they been a U.S. particular person instant previous to their demise; (2) property that will have been included within the coated expatriate’s taxable property even when not acquired as a result of demise of the coated expatriate (for instance, Part 2035 property); and (3) distributions made due to the demise of a coated expatriate from non-electing international trusts to the extent that the distributions are attributable to coated transfers. Critically, bequests reported on a well timed filed U.S. property tax return are excluded from the definition of a coated bequest (equally, items reported on a well timed filed U.S. reward tax return are excluded from the definition of a coated reward).
- The proposed regs required that the Part 2801 tax be “well timed paid.” The ultimate regs eradicate this requirement because it “may current administrability and finality challenges.” That is constructive information provided that Kind 708 hasn’t been issued but.
- Beneath the proposed regs, it was attainable for a similar coated switch to be topic to Part 2801 tax a number of instances (for instance, if a coated expatriate items a the rest curiosity in property throughout their lifetime and the earnings curiosity is transferred at their demise). The ultimate regs embrace a brand new rule that limits subsequent Part 2801 taxation to the surplus worth of the coated bequest that had not already been taxed as a coated reward.
- The proposed regs said {that a} reward or bequest that qualifies for the marital deduction isn’t a coated reward or bequest, and, subsequently, certified home trusts (QDOTs) and certified terminable curiosity property trusts (QTIPs) could possibly be excluded from the definition of a coated switch. The ultimate regs make clear that QDOT and QTIP elections could solely be made with respect to U.S. situs property and, subsequently, coated expatriates will have to be cautious about putting non-U.S. situs property in these constructions.
- The proposed regs said that the date of receipt of a coated reward is decided as if the coated expatriate had been a U.S. particular person when the reward was made. The ultimate regs present a broader definition of the date of the reward to ease potential difficulties in figuring out the worth of the coated switch and fee of the related Part 2801 tax.
Disproving Presumption
An vital takeaway is that it’s the duty of the recipient of a coated switch to find out whether or not the particular person making the switch is a coated expatriate and whether or not the switch qualifies as a coated switch. The ultimate regs state that there’s a presumption that any reward or bequest to a U.S. particular person from an expatriate is a coated switch. It’s, subsequently, the recipient’s burden to disprove such presumption. This burden might be significantly onerous when the switch at situation is a distribution from a non-electing international belief, and the belief beneficiary who receives the property doesn’t know who funded the belief or when such funding occurred.
