Key Takeaways
-
U.S. taxpayers should help understand new Section 2801 rules that impose a 40% tax on gifts and bequests from covered expatriates starting in 2025.
-
Recipients must help file Form 708 to report covered gifts, bequests or foreign trust distributions under the Internal Revenue Code (IRC).
-
Coordinating with qualified tax advisors can help ensure compliance, accurate trust ratio calculations and proper use of available exclusions.
U.S. citizens and residents who receive gifts or inheritances from individuals who have relinquished U.S. citizenship or long-term residency — referred to as “covered expatriates” — may be subject to a 40% tax under Internal Revenue Code (IRC) Section 2801. This tax applies regardless of whether the asset is located in the U.S. or abroad and extends to distributions from foreign trusts funded by covered expatriates.
As U.S. taxpayers increasingly encounter cross-border transfers involving former U.S. persons, it is critical to understand not just the existence of this tax regime — but also the practical steps required for compliance and risk mitigation. Section 2801, enacted as part of the Heroes Earnings Assistance and Relief Tax (HEART) Act of 2008, imposes a 40% tax on:
- Covered gifts and covered bequests from a covered expatriate (i.e., individuals who relinquished U.S. citizenship or long-term residency and met certain asset/income thresholds).
- Distributions from foreign trusts attributable to such gifts or bequests.
The tax applies regardless of the location of the asset (U.S. or foreign). Previously, enforcement was suspended pending final regulations. Although the law was enacted in 2008, enforcement was delayed until final regulations were issued on January 10, 2025. These rules apply to covered gifts/bequests received on or after January 1, 2025.
Distributions on or after January 1, 2025 from trusts that received covered transfers at any time since June 17, 2008, the HEART Act enactment date.
Who Is Subject to Tax
- U.S. citizens or residents receiving covered gifts or bequests.
- Domestic trusts and electing foreign trusts are treated as U.S. recipients.
Tax Reporting
The covered gifts and covered bequests, as well as the corresponding tax, are reported on new Form 708, United States Return of Tax for Gifts and Bequests Received from Covered Expatriates. The recipient is responsible for filing Form 708 and paying the tax, which is calculated at the highest estate or gift tax rate. As of 2025, this rate is 40%. Unlike typical gift tax rules, the annual gift exclusion and the lifetime exemption generally do not apply to gifts from covered expatriates. A credit may be available for foreign estate or gift taxes paid on the transfer. The tax is calculated as follows:
Taxable amount = 40% multiplied by fair market value (FMV) of covered gift/bequest minus annual exclusion ($19,000 for 2025).
Due Date
The due date for Form 708 is on or before the 15th day of the 18th calendar month following the close of the calendar year in which the gift or bequest was received. For example, if a covered gift or covered bequest is received in 2025, Form 708 is due by July 15, 2027. An automatic 6-month extension to file Form 708 is available, although the specific form for requesting this extension is not yet specified.
Trust Distributions and the Section 2801 Ratio
Section 2801 also applies to distributions from domestic or electing foreign trusts. A “section 2801 ratio” is calculated to determine how much of a distribution from the trust is attributable to covered transfers.
In order to calculate the ratio, the taxpayer must determine the fair market value of the portion of the trust attributable to the covered gifts and bequests the trust has received and the fair market value of the portion of the trust attributable to other contributions. Thus, the taxpayer must know the contributions made before and after the effective date of Section 2801 (June 17, 2008) and after the donor’s expatriation.
This ratio is recomputed after each new contribution to the trust. An example of this would be if in a foreign trust, the fair market value before a covered gift was $1,000,000 and a covered gift of $100,000 was made, the Section 2801 ratio changes to 0.09 (0 × $1,000,000) + $100,000) / $1,100,000). Therefore, 9% of each distribution made from the trust to a U.S. recipient after the covered gift was made would be subject to the Section 2801 tax.
If there is not enough information available to calculate the ratio, it will be presumed that the entire distribution is attributable to the gift and, therefore, the entire distribution would be subject to the Section 2801 tax.
Exceptions and Exclusions
Not all gifts or bequests from expatriates are subject to tax. The following are excluded from taxation under the final regulations:
- Gifts or bequests properly reported on a timely-filed U.S. gift or estate tax return.
- Transfers to a U.S. citizen spouse (subject to marital deduction rules).
- Qualified charitable donations eligible for the estate or gift tax charitable deduction.
- Certain transfers under Section 2503(e) which excludes from gift tax any amounts paid by the expatriate on behalf of an individual:
- Directly to an educational institution for tuition, or
- Directly to a medical provider for medical care.
- Qualified disclaimers of property (i.e., gifts being refused).
- Gifts or bequests not received by a U.S. citizen or resident.
- Protective Form 708 filings: If a U.S. recipient reasonably determines that a transfer is not subject to Section 2801, they may file a protective Form 708 to start the statute of limitations for assessment.
Important Considerations
U.S. recipients of gifts should:
- Implement procedures to identify covered expatriate transfers beginning in 2025.
- Review trust agreements and contribution history to calculate Section 2801 ratios for any foreign trusts of which they are a beneficiary.
- Coordinate with your tax advisor if you are a trust beneficiary or recipient of foreign transfers.
- Consider a protective filing when classification of a transfer is uncertain.
- Keep good records – recordkeeping and timely filing are critical to claim exclusions and avoid penalties.
Final Thoughts
Section 2801 imposes a unique compliance burden on recipients — not donors — of certain cross-border transfers. Even where tax is ultimately not due, documentation, analysis and protective filings are essential to mitigate risk.
Contact Us
If you are the recipient of gifts, inheritances or trust distributions potentially linked to a covered expatriate, contact your client service team or those listed below to begin evaluating your exposure and filing obligations:
Joseph Parmegiani, JD, CPA
Partner
jparmegiani@pkfod.com
Yevgeny Antonov, JD
Supervisor
yantonov@pkfod.com
Donna Perrette, JD, CPA
Manager
dperrette@pkfod.com