Proposal to U.S. Treasury and IRS: awaits Final Regulations on “Covered Gifts” and “Covered Bequests”

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When people write about the taxes from expatriation, the focus seems to be on the income tax provisions.  Maybe that is normal, since an income tax can be immediately triggered with reference to the “expatriation date” as defined in the law.Covered Gifts Bequests Paper - DC Cover Page

However, the most costly tax will often be the tax on “Covered Gifts” and “Covered Bequests” which went into effect in 2008, but is awaiting Treasury regulations for publication.

Proposed regulations are in the works and presumably were going to be released before the end of the year.  In May of this year, I presented a set of formal recommendations to the U.S. Treasury and IRS on this topic in a paper entitled:

This proposal can be read in its entirety here, and the executive summary is set out below:Covered Gifts Bequests Paper - DC - Executive Summar


The reason these regulations are so important, is due to the tax cost of taxes upon U.S. beneficiaries.  See, The “Hidden Tax” of Expatriation – Section 2801 and its “Forever Taint.”

The tax is currently levied at a 40% rate on basically the full vale of the asset upon the gift or bequest.  It also continues on for potentially generations into the future; e.g., if U.S. beneficiaries receive property held in trust that was funded by a “covered expatriate.”  For instance, to demonstrate the consequences, we can assume a former U.S. citizen who is a “covered expatriate” (e.g., for failure to properly certify under Section 877(a)(2)(C) and file IRS Form 8854, even though the income tax or asset tests are not satisfied) funds a trust in a foreign country for her grandchildren and great grandchildren.   See, How many former U.S. citizens and long-term lawful permanent residents have filed (or will file) IRS Form 8854?

Over time, the value of those trust assets  grow substantially and 30 years after her death (e.g., the year 2055), the trust starts distributing US$100,000 annually to several U.S. citizen grandchildren and grandchildren.   Under the current law, each time the distribution is received, a 40% tax should be levied on each distribution.  The law leaves many unanswered questions, until the proposed regulations are issued.

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