Do You Know Where Your Gift or Bequest Is Coming From? If Not, You May Be Subject to a Gift/Inheritance Tax and the Related New Reporting.

Pursuant to Internal Revenue Code Section (“Code §”) 2801, if you are a “U.S. Beneficiary”^[1] - who is the recipient of a gift or bequest from, or a distribution from a trust established by, a former U.S. citizen or former Green Card holder (i.e., an expatriate), then you may be subject to a 40% tax upon receipt of that gift or bequest, or distribution from a trust (the “§2801 Tax”). These gifts, bequests, and distributions are to be reported by U.S. Beneficiaries on a new form designed by the Internal Revenue Service (“IRS”) (the “Form 708”).

On January 10, 2025, almost a decade after the issuance of the proposed regulations on September 10, 2015, final regulations were issued implementing the §2801 Tax (the “Final Regulations”), clarifying some aspects of its application (while blurring others), detailing compliance requirements, and other enforcement mechanisms. On May 15, 2025, the IRS finally posted a DRAFT of the Form 708 on its draft tax forms website.^[2]

Now that the DRAFT Form 708 has been posted, it is important for U.S. Beneficiaries and trustees to become acclimated with the new reporting rules.^[3]

Whom Does this Affect?

• Individual and corporate trustees of trusts governed by the laws of any state within the U.S. and by foreign jurisdictions; and

• U.S. citizen and U.S. domiciled individuals who receive gifts from a foreign individual or a foreign trust.

What is the Purpose of the §2801 Tax?

The purpose of the Ҥ2801 Tax" is to create some perceived parity between gifts and bequests from an expatriate and gifts and bequests from a U.S. citizen to another U.S. citizen, or U.S. domiciliary, or trust.

What is the Applicable Rule?

The §2801 Tax imposes a tax on a U.S. Beneficiary who receives a “covered gift or bequest” from a “covered expatriate” at the highest estate or gift tax rate in effect at the time of the transfer (i.e., 40%, in 2025).^[4]

What Are a U.S. Beneficiary’s Compliance Obligations Related to the §2801 Tax?

The Final Regulations clarify that the §2801 Tax will not apply to gifts or bequests received by a U.S. Beneficiary prior to June 17, 2008. The IRS provided relief for the reporting requirements and the tax obligations required by the §2801 Tax for gifts or bequests made after June 17, 2008, by deferring the same pending issuance of IRS guidance.^[5]

A U.S. Beneficiary who receives a covered gift or bequest must timely file Form 708. Only a DRAFT of Form 708 is available, and the final version of the Form 708 has not been released as of the date of this article.

The Final Regulations indicate that, when finalized, the due date for Form 708 is on or before the 15^th day of the eighteenth calendar month following the close of the calendar year in which the covered gift or covered bequest was received. A U.S. Beneficiary is not required to file Form 708 for a calendar year in which the total fair market value of all covered gifts and bequests received by that person during the calendar year is less than or equal to the annual gift tax exclusion amount in effect for such calendar year (i.e., $19,000 for 2025). Further, the Final Regulations state that an automatic 6-month extension of time to file Form 708 will be available to taxpayers who elect an extension on the appropriate form.^[6] It is unclear which form will be used for requesting an extension.

How Does A U.S. Beneficiary Know They Received A Covered Gift or Bequest?

The Final Regulations place the burden of determining whether the transferor is a covered expatriate, and whether the transfer is a covered gift or covered bequest, on the taxpayer.^[7] In limited circumstances, which have yet to be defined, the IRS will disclose to a U.S. Beneficiary in receipt of a gift or bequest from an expatriate whether the donor or decedent was a covered expatriate and whether the transfer was a covered gift or covered bequest.^[8]

A reasonable assumption might be that one of the ways that are yet to be defined to allow this disclosure will be that a donor expatriate will be able to authorize the U.S. Beneficiary to have access to this information presumably on the donor expatriate’s filed IRS Form 8854. This is because the Final Regulations create a rebuttable presumption that a donor expatriate is a covered expatriate and that a gift is a covered gift unless a living donor expatriate authorizes the disclosure of the donor expatriate’s relevant return or return information to the U.S. Beneficiary of any gift.^[9] Clearly, an expatriate donor should have filed Form 8854 when he or she expatriated, and it is therefore understandable why authorizing the U.S. Beneficiary to have access to the IRS records would help define the expatriate donor’s status as a covered expatriate or not.  If such authority is not given, it is arguably reasonable to believe that Form 8854 may never have been filed, in which case this would mean that a person who expatriated after June 17, 2008, is a covered expatriate (and, therefore, the presumption). To the extent that such presumption applies, a U.S. Beneficiary must then undertake a Herculean task to prove to the IRS whether a gift from an individual to them does not include assets transferred by a covered expatriate. This said, although one might think that a copy of the expatriate donor’s Form 8854 and proof of filing might suffice, the Final Regulations do not clearly advise what is sufficient to prove that the expatriate donor was not a covered expatriate (at least Hercules could return with the carcass of the Nemean lion).

In addition, the Final Regulations allow a U.S. Beneficiary who receives a gift or bequest and concludes that such gift or bequest is not a covered gift or covered bequest to file a protective Form 708.^[10] The act of filing a protective Form 708 will commence the running of the period of limitations for assessment of tax, if the protective return includes all of the information otherwise required on Form 708, along with an affidavit signed under penalty of perjury, setting forth the information on which the U.S. Beneficiary relied in concluding that the donor or decedent was not a covered expatriate or that the transfer to a trust was not a covered gift or covered bequest. The U.S. Beneficiary must also attach a copy of the completed Part III of IRS Form 3520 for all trust distributions, or Part IV of Form 3520 for all gifts and bequests when applicable.^[11] QUERY: Absent additional guidance, does this mean that every U.S. Beneficiary should file a protective Form 708 with respect to every gift or bequest received? Wouldn’t the most conservative thing to do be to file a protective Form 708 to ensure the statute of limitations starts to run (similar to the filing that may be done in certain situation with gifts made by U.S. persons)?

If a taxpayer fails to file Form 708 or pay the §2801 Tax, various penalties may be applicable.^[12] As with all IRS penalties, these penalties can become substantial.^[13] Notably, a U.S. Beneficiary may request an extension of time to file, but not for time to pay the §2801 Tax.

Key Take-Aways

If you are a trustee, you should create new or additional due diligence items for the trusts you manage relating to the §2801 Tax. For example, a trustee will have to track and compute information regarding the §2801 Tax, and provide U.S. Beneficiaries with such information upon making distributions so that the U.S. Beneficiaries can determine the §2801 Tax liability. Trustees will need to be cognizant of the Form 708 and the deadlines for filing and paying the tax. Either way, trustees should inquire whether the settlor of a trust or any other party otherwise contributing property to a trust is a covered expatriate or not.

U.S. Beneficiaries who are recipients of gifts or bequests from individuals they know are covered expatriates will need to inform their U.S. tax return preparer of such covered gifts and bequests for purposes of timely filing Form 708 (and applicable Form 3520). U.S. Beneficiaries who are recipients of gifts or bequests from individuals they are not aware are covered expatriates, or receive distributions from a trust that they are not aware was funded by a covered expatriate, should discuss with their U.S. tax advisors to determine whether he or she should file Form 708 (or a protective Form 708) for such gift, bequest or distribution from that trust. With a draft Form 708 now issued, tax return preparers, trustees and U.S. Beneficiaries should be ready to comply with §2801 Tax by the end of the year.

If you are planning to expatriate or have already expatriated but your spouse plans to remain a U.S. citizen or U.S. estate and gift tax domiciliary, we caution that the IRS’ position is that the typical marital trust planning will not defer the §2801 Tax as to any foreign situs assets transferred to the marital trust. The easiest ways to avoid the §2801 Tax on covered gifts or bequests to a U.S. Beneficiary spouse is to give your spouse an outright gift.  This is not for most practitioners common wisdom planning.

Our Firm is available to discuss these reporting obligations related to the §2801 Tax and potential planning considerations to help mitigate the §2801 Tax liability.