Section 2801 Final Regulations: Tax on Gifts From Expatriates

“Section 2801 Final Regulations: Tax on Gifts From Expatriates,” that is the subject of today’s ACTEC Trust and Estate Talk.

I’m ACTEC Fellow Stacy Singer from Chicago.

Section 2801 applies a tax on the recipient of a gift or bequest from certain individuals known as Covered Expatriates, who gave up United States citizenship or long-term residency. Although the statute has been in place since 2008, final regulations were only issued last year, bringing long-awaited guidance to this complex area.

ACTEC Fellow Toni Ann Kruse of New York City will explain what the final regulations say, who may be affected, and the estate planning considerations practitioners should keep in mind. Welcome, Toni Ann.

Toni Ann Kruse:  Thanks so much, Stacy. Happy to be here.

I had the pleasure of speaking on some hot topics at our last ACTEC annual meeting, and one of the topics we talked about, as Stacy mentioned, were the Section 2801 final regulations that were issued last year. Section 2801 was enacted as part of the Heroes Act of 2008, and Section 877A covers a mark-to-market exit tax for Covered Expatriates. Now those are a lot of terms, so we’re going to go a little bit into what this section does and who it applies to.

What Is the Section 2801 Tax?

If a U.S. citizen expatriates, or in other words, renounces citizenship, or if a long-term green card holder gives up their green card, they are officially no longer U.S. income taxpayers. They are outside the U.S. income tax net, but doing this involves a cost. The cost to get out of the U.S. income tax net is that they have to pay this U.S. “exit tax” under IRC Section 877A — that’s where the tax is applied — and it results in a deemed sale and potentially significant capital gains tax.

By expatriating, there’s long been an argument that these individuals have now eliminated their U.S. estate and gift tax exposure, and that that was unfair. Section 2801 tax was then enacted in 2008 to limit the estate and gift tax benefits of expatriation or giving up your green card. The 2801 tax falls on the U.S. person or trust receiving the gift, receiving the bequest, or receiving a distribution from a trust that was set up by a covered person, a “covered expatriate”. And the reason for that is that the U.S. can really only enforce the tax against the U.S. people who are receiving the assets from a covered expatriate. They no longer really have authority over that covered expatriate who exited the U.S. Although lawmakers have said that these rules were enacted to make expatriation more tax-neutral, in many instances the 2801 tax can be more punitive than the U.S. estate and gift tax regime as it applies to U.S. persons.

The Section 2801 tax was on pause for quite a long time, for about 17 years, because the IRS was working on these regulations. The proposed regulations were issued back in 2015, but now finally, as of January 1, 2025, we have final regulations. And the individuals, U.S. trust and their trustees, and U.S. beneficiaries of foreign trusts and their trustees, are all impacted by this tax.

Who Is Considered a Covered Expatriate?

Now just to give a little bit of background on exactly who a covered expatriate is; a covered expatriate includes certain U.S. persons and long-term residents who expatriate after 2008, and this term covered expatriate is defined as a U.S. citizen who relinquishes citizenship or a green card holder whose status is revoked or abandoned at a time when the person was a lawful permanent resident of the U.S. for at least 8 of the prior 15 years. They expatriated after June of 2008 and they meet at least one of the following tests:

• The first test is the net income test, which, you know, checks to see if they have an average annual U.S. income tax liability over the 5 preceding years of over $206,000.
• The net worth test checks to see if they have a worldwide net worth in excess of $2 million,
• And then finally the certification test, which is that they have failed to certify compliance with all U.S. federal tax obligations for the prior five years.

How the Section 2801 Tax Is Calculated

The exit tax then treats all of the property of expatriating person as being sold for fair market value on the date of expatriation. Section 2801 covers this tax, if the aggregate value of the covered gifts or requests exceeds the inflation-adjusted annual exclusion — which is currently $19,000 — the 2801 tax is computed by applying the highest receipt tax rate in effect on the date of receipt — which is currently 40% — to the fair market value of the gift. And that amount is reduced by any gift or estate tax paid to a foreign country on the same gift or bequest.

On the $19,000 annual exclusion, the recipient really only gets the benefit of one, so meaning that if the recipient received gifts from multiple covered expatriates, $19,000 is a limit, anything above it is taxed at 40%. And again, this tax applies to gifts and bequests made after January 1st, 2025, but it’s also important to keep your eye out for transfers from a covered expatriate to a trust that was funded any time after June 17th, 2008, and a transfer from that trust to a U.S. recipient after January 1st, 2025. This would be subject to the 2801 tax as well.

How Section 2801 Applies to Trusts

So, the 2801 tax is triggered on trust settlement, funding, or domestication. So, settling or funding a domestic completed gift trust and the trust is a U.S. recipient, they’re subject to that 2801 tax.

• If there’s a foreign completed gift trust that then domesticates, the trust is subject to the 2801 tax on domestication.
• If you have trusts that are funded or settled prior to January 1, 2025, you need to think about whether it’s a completed or incomplete gift and if it’s foreign versus domestic.
  • If it’s a completed domestic trust, there’s no 2801 tax on distributions.
  • If it’s an incomplete domestic trust, there’s 2801 tax on distributions from January 1st, 2025, forward.
  • If it’s a completed or incomplete foreign trust, then there would be the 2801 tax going forward after January 1st, 2025, on any distributions.
  • And if it’s a completed foreign trust prior to that 2008 date, then there’s no 2801 tax.

So lots of complication around dates, particularly because of the delay between the time of the statute and the time of the issuance of the regulations.

Form 708 Reporting and Filing Deadlines

What happens if these apply to you? What do you do? Form 708 is the form in which these transfers should be reported, and that form was also released last year. In December of 2025, they released the draft version, and it’s called the United States Return of Tax for Gifts and Bequests Received From Covered Expatriates. And the purpose is really to just report these items that are received from a covered expatriate.

The Form 708 and any Section 2801 tax is due and must be filed by the 15th day of the 18th month following the close of the calendar year in which the covered gift or covered bequest was received. And then you can obtain — a recipient may obtain — an automatic six-month extension of time to file the Form 708 by timely filing Form 7004 on or before the original due date. But the Form 7004 must include an estimate of the tax liability. It only extends the time to file, not the time to pay.

Exceptions and Exclusions From Section 2801 Tax

One other thing I wanted to cover is exceptions and exclusions from this tax.

• Any transfer that is reported on a timely filed U.S. gift or estate tax return, this tax would not apply;
• We already discussed the annual gift tax exclusion, so again, if it’s under $19,000, it doesn’t apply;
• Charitable and marital transfers are also excluded from 2801 as our Q-Tip and Q-Dot marital transfers;
• And a credit is allowed for foreign gift or estate tax that’s paid on the same covered gift or covered bequest.

Uncertainty for Transfers Made Between 2008 and 2025

As you can see, there is still some uncertainty with respect to how these final regulations apply. The final regulations are completely silent as to transfers between 2008 and 2025, which just leaves a lot of uncertainty on whether there is an obligation to report and pay tax for gifts that were received in that window. The recipients during this window technically had a statutory obligation to report and pay the tax, but the obligation was deferred until final regulations were issued. And now the final regulations are issued and they make no mention of this. With that, I mean, I think that’s a pretty good overview of how the Section 2801 statute and regulations apply as we stand today, and we can always report back if there’s more to follow up on.

Stacy Singer:  Thank you so much, Toni Ann, for covering what I know from experience is a really complicated topic and giving us a lot of really great information. And thanks everyone for listening.

 

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