IRS Proposes Rules on Gifts and Inheritances from Expats

The proposed rules stem from the Heroes Earnings Assistance and Relief Tax Act of 2008, or “HEART Act,” which applied to certain individuals who terminate their U.S. citizenship or permanent residents who surrender their green cards on or after June 17, 2008.
The HEART Act introduced two new sections to the Tax Code, 877A and 2801. Section 877A imposed an exit tax on such individuals, and the Treasury and the IRS released guidance in 2009 for Section 877A. However, the Treasury and the IRS have not issued guidance for Section 2801 until now.
The key component of Section 2801 is that U.S. taxpayers who receive gifts and inheritances from people who previously expatriated are subject to gift and/or estate taxes on the receipt of such gift or bequest.
 The number of people giving up their U.S. citizenship has accelerated in recent years, in part due to later legislation such as the Foreign Account Tax Compliance Act, or FATCA, which was passed in 2010 as part of the Hiring Incentives to Restore Employment Act, also known as the “HIRE Act.” Last year, 3,415 Americans renounced their citizenship (see Americans Living Abroad Set Record for Giving Up Citizenship). There have been calls in Congress from Sen. Rand Paul, R-Ken., and others to repeal FATCA. But taxes aren’t the only reason why Americans move abroad.
 Under the estate and gift tax rules, a foreign person can make a gift to somebody in the U.S., and there is no gift tax as long as it’s not a U.S.-sited asset.
“There’s no tax consequence to the recipient”. “If the value of the gift is over $100,000, they need to file a 3520, but there’s no tax consequence. It’s the same as it relates to death. If you inherit property from a foreign person, and the value is over $100,000, you file a 3520, but there’s no tax consequence. You may have an 8938 filing obligation because an interest in a foreign estate is a reportable asset, but don’t you don’t have to do anything more.”

One area that could provide a potential loophole involves life insurance. “Certain practitioners who focus on life insurance as a practice area have proposed and premised that somebody who is a covered expat could buy a life insurance policy or do something with life insurance and that probably would not be included in many of these rules because life insurance always has such a wonderful tax classification and characterization in the Code”. “I don’t see anything in the law that would prohibit that.”

However, the proposed regulations do mention, in a section about covered bequests, “life insurance proceeds payable upon the covered expatriate’s death that would have been includible in the covered expatriate’s gross estate under section 2042 if the covered expatriate had been a U.S. citizen at the time of death.”
The proposed regulations also note, “For every policy of life insurance listed on the return, the U.S. recipient must procure a statement from the insurance company on Form 712 and file it with the IRS office where the return is filed. If specifically requested by the Commissioner, the insurance company must file this statement directly with the Commissioner.”


A new Form 708 is also required under the proposed regulations to report by the recipient of a gift or bequest by an expatriate. The form has not been issued yet. According to the proposed regulations, the deadline to file the form is the 15th day of the 18th calendar month following the close of the calendar year in which the gift or bequest was received. For anybody who received a gift or bequest that would be covered by these rules prior to the period of the regs having come out, the deadline for filing is “a reasonable period of time after the date of the publication of the final regulations.”