Hercules’ 13th Labor: Compliance with the U.S. Section 2801 Inheritance Tax
Internal Revenue Code Section (“Code §”) 2801 was introduced into U.S. tax law in 2008. It has been a dormant law, with no regulations issued or collection mechanism (or related forms) implemented for seventeen years. Generally, §2801 created a U.S. based inheritance tax (the “§2801 Tax”). On January 10, 2025, final regulations were issued implementing the §2801 Tax (the “Final Regulations”). On May 15, 2025, the Internal Revenue Service (“IRS”) finally posted a DRAFT of the Form 708 (the “Form 708”) on their draft tax forms website. Now that the draft Form 708 has been posted, it is important for U.S. citizens, U.S. estate and gift tax domiciliaries1, and trustees of domestic trusts (or of a foreign trust electing to be treated as a domestic trust for this purpose) (“U.S. Beneficiaries”) to become familiar with these rules.2
What is the Intent of the §2801 Tax?
Generally speaking, the intent of the §2801 Tax is to minimize a perceived disparity between gifts and bequests to a U.S. Beneficiary from a U.S. citizen (which are subject to the U.S. estate and gift tax rules) and gifts and bequests received by a U.S. Beneficiary from someone who has expatriated for U.S. tax purposes (which may escape the U.S. estate and gift tax rules).
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). A “covered gift or bequest” means: (i) any property acquired by gift directly or indirectly from an individual who, at the time of such acquisition, is a covered expatriate; and (ii) any property acquired directly or indirectly by reason of the death of an individual who, immediately before such death, was a covered expatriate. A “covered expatriate” means a U.S. citizen or long-term permanent resident who renounces citizenship or relinquishes a so-called “Green Card” (held for 8 of the last 15 years) on or after June 17, 2008 for tax avoidance purposes (with three objective tests determining the existence of a tax avoidance purpose).3
Certain exceptions exist, such as for a gift or bequest that qualifies for the marital deduction. The Final Regulations take the position that typical marital trust planning (whether through a qualified terminable interest property trust or a qualified domestic trust) will not defer the §2801 Tax as to any foreign situs assets transferred to the marital trust.4
What Are a U.S. Beneficiary’s Compliance Obligations Related to the §2801 Tax?
U.S. Beneficiaries who receive a covered gift or bequest must timely file Form 708. The Final Regulations indicate that the due date for Form 708, when finalized, is on or before the 15th 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 in which the total fair market value of all covered gifts and bequests received by that person during a 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).5
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.
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 U.S. Beneficiary. In limited circumstances, which have yet to be defined, the IRS will disclose to a U.S. Beneficiary whether the donor or decedent was a covered expatriate and whether the transfer was a covered gift or covered bequest. 6
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.7 To the extent the 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 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 708.8 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: (1) all of the information otherwise required on Form 708; (2) an affidavit signed under penalty of perjury, which sets 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; and (3) a copy of the completed Part III of Form 3520 for all trust distributions or Part IV of Form 3520 for all gifts and bequests, when applicable.9 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. As with all IRS penalties, these penalties can become substantial. Notably, a U.S. Beneficiary may request an extension of time to file, but not 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 of a foreign trust 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, if any. Trustees of domestic trusts will need to be cognizant of the Form 708 and the deadlines for filing and paying the tax. Trustees should inquire (and maintain records relating to) 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 foreign trust that they are not aware if a covered expatriate, was involved in the funding, should discuss this with their U.S. tax advisors to determine whether a protective Form 708 for such gift, bequest or distribution from that trust should be filed.
If your client is planning to expatriate, or has already expatriated, but their spouse plans to remain, or has remained, 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 way to avoid the §2801 Tax on covered gifts or bequests to a U.S. Beneficiary spouse is to give that spouse an outright gift. This is not, for most practitioners, common wisdom planning.
*This was republished with permission from the STEP Journal. Click to access the publication.
[1] A person is considered domiciled in the U.S. for U.S. federal estate and gift tax purposes if such individual is physically present in the U.S. with the intent to remain indefinitely. See U.S. Treasury Regulation Section (“Reg. §”) 20.0-1(b)(1) and Reg. §25.2501-1(b). It should be noted that a Green Card is only a factor in determining a person’s domicile.
[2] We note that this article is not intended to cover all aspects of the §2801 Tax.
[3] See Code §2801(e)(1)(A) and (B). See, also, Code §877A(g)(1).
[4] See Code §§2801(e)(2) and 2801(e)(3) and see Reg. §28.2801-3(c)(5).
[5] See Reg. §28.6081-1.
[6] See Reg. §28.6081-7 (a); see further Reg. §28.6081-7 (b)(1).
[7] See Reg. §28.2801-7(b)(2).
[8] See Reg. §28.2801-7(c).
[9] See Reg. §28.6011-1(b) which provides the safe harbor procedures for filing a protective Form 708.
