While Relinquishing One’s US Citizenship Can Mitigate Estate and Gift Tax Obligations

Trusts and Estates | Ladidas Lumpkins | Oct 15, 2019

Relinquishing one’s US citizenship can mitigate an individual’s estate and gift tax obligations, but a “Covered Expatriate”* should plan carefully when disposing of assets. Internal Revenue Code Section 2801 imposes a tax on US citizens or residents who receive certain gifts or bequests from Covered Expatriates (CEs). Even if the property is non-US-situs property, all of it is subject to the 2801 taxing regime.

That said , Section 2801 does offer planning opportunities.

Lifetime Gifting

Annual Exclusion Gifts – CEs can give an unlimited number of USD 15,000 gifts of cash or property, completely tax free.

Gifts/Bequests of US Property – Section 2801 does not apply to gifts “otherwise subject to
US estate or gift taxes”.

Unlimited Marital and Charitable Deduction

Gifts to US Spouse – CEs can transfer unlimited amounts of property to a spouse tax free.

Domestic and Foreign Trusts

A Domestic Trust Gift – This is treated as if it were a US person
and pays tax at the highest marginal tax rate applicable.

Transfers to Foreign Trusts – These should be analysed carefully.

Using Foreign Trusts to Defer Taxes – CEs can achieve tax­ deferral and income-tax savings.

Distributions from Foreign Trusts – When attributable to a gift or bequest from CEs, the
2801 taxing regime applies.

Election to Be Treated as A Domestic Trust – This allows CEs to plan whether they want to pay the taxes now or in the future.

Life Insurance Trusts – These can cover insurance premiums and provide funding for taxes
and other wealth protection.

Gifts to Non-US Persons

Avoiding Estate and Gift Taxes – Simply gift non-US-situs assets to non-US persons.

Allocation of Gifts Among US Persons – Taxes for a portion of an estate that is US-situs and left to US beneficiaries, would be borne by CEs.

Generation-Skipping Transfer (GST)

It can avoid the additional GST tax currently with a top rate of 40%.

Click here for a definition of “Covered Expatriate.”

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