Taxing Covered Gifts and Bequests: Key Takeaways from the Final § 2801 Regulations

§ 2801 of the Internal Revenue Code of 1986, as amended (the “Code”) imposes a tax a U.S. citizen or resident who receives a “covered gift” or “covered bequest” from certain individuals who expatriated on or after June 17, 2008 (“covered expatriates”). On January 14, 2025 – more than nine years after proposed regulations explaining Code § 2801 were first issued – the Treasury Department published final regulations under Code § 2801 (the “Regulations”). Unfortunately, the Regulations do not incorporate many of the comments received on the proposed regulations; many questions remain unanswered and the Regulations may prove difficult to comply with in practice.

Under Code § 2801 and the Regulations, a U.S. citizen or resident who receives a covered gift/bequest after January 1, 2025 must report it on a Form 708 – United States Return of Tax for Gifts and Bequests Received from Covered Expatriates, and pay the tax under Code § 2801 by the 15^th day of the 18^th month following the close of the year in which the covered gift/bequest was received. The tax on a covered gift/bequest is equal to highest estate tax rate (currently 40%) on the value of the covered gift/bequest received (less the annual exclusion amount—currently $19,000). This tax may be reduced by gift or estate taxes paid to a foreign country.

While the Regulations clarify some points, many questions remain. For example, the Regulations do not address how § 2801 interacts with estate and gift tax treaties, and punts for this to be resolved on a case by case basis. In addition, the Regulations do little to address the practical issue that the tax under § 2801 is imposed on the recipient of a covered gift/bequest but that the recipient may not have ample information to determine whether the donor/decedent was a covered expatriate. Lastly, the legislative history indicates that the inclusion of § 2801 was intended to make expatriating a tax neutral decision, but the Regulations did not address the myriad situations where expatriating may end up increasing the cost, from a U.S. estate/gift tax perspective. How this plays out in practice remains to be seen.

A link to the Regulations can be found here: Guidance Under Section 2801 Regarding the Imposition of Tax on Certain Gifts and Bequests from Covered Expatriates