IRS Releases Proposed Regulations on Taxing Expatriates’ Gifts and Bequests to U.S. Citizens and Residents

By, Caitlin Glynn of Rackemann, Sawyer & Brewster

Recent guidance has been issued to implement Internal Revenue Code Section 2801 (“Section 2801”) which imposes a succession tax on U.S. citizens and residents who receive gifts or bequests from individuals who relinquished U.S. citizenship or ceased to be lawful permanent residents of the United States on or after June 17, 2008 and were “covered expatriates” as defined by the Statute.

IRC Section 2801 Explained

Section 2801 was added to the Internal Revenue Code by The Heroes Earnings Assistance and Relief Tax Act of 2008 (“HEART Act”).  In passing the HEART Act Congress determined that it was appropriate and in the interests of tax equity to impose a tax on U.S. citizens and lawful residents who receive from an expatriate a gift or bequest that would otherwise not be subject to U.S. estate and gift tax.  Under Section 2801 the receipt of covered gifts or covered bequests by U.S. citizens or residents from covered expatriates is subject to tax.  For purposes of calculation of the tax on the gift or bequest, the amount of the gift is its fair market value as of the date of receipt and the tax imposed is the highest applicable gift and estate tax rate (currently 40 percent).

Section 2801 is distinctive in that it imposes the tax on the recipient of the gift or bequest, rather than the donor or estate of the decedent.  The tax will be imposed whether the donor or decedent acquired the property transferred before or after expatriation.  The tax will not apply to those gifts that do not exceed the gift tax annual exclusion amount for the year.   The tax is also reduced by the amount of any gift or estate tax paid to a foreign country with respect to a covered gift or bequest.

Previous Guidance from the IRS

On July 20, 2009 the Treasury Department and the IRS issued Announcement 2009-57.  This Announcement states that the IRS intends to issue guidance under Section 2801.  The Announcement further provides that tax payments and filing requirements of the statute are deferred pending the issuance of final regulations.

The Proposed Regulations

The Proposed Regulations amend Title 26 by adding Part 28, “Imposition of Tax on Gifts and Bequests from Covered Expatriates.”  The proposed Regulations are divided into seven sections and include Sections 28.2801-1 to 28.2801-7.  See Internal Revenue Bulletin 2015-39.

Section 28.2801-1 sets forth the general rule of liability for the tax, that the tax is imposed on U.S. citizens or residents who receive covered gifts or covered bequests from a covered expatriate.  Domestic trusts and foreign trusts electing to be treated as domestic trusts are treated in the same manner as U.S. citizens.  Section 28.2801-2 provides definitions for Section 2801, including important terms such as “covered expatriate,” “covered bequest,” “domestic trust,” “foreign trust” and “power of appointment.”  “Covered expatriate” is defined by reference to Section 877A(g)(1).  Section 877A(g)(1) generally defines a “covered expatriate” as an individual who expatriates on or after June 17, 2008, and whose average annual net income for the period five taxable years before expatriation exceeds $124,000 (subject to a cost of living adjustment), or whose net worth as of expatriation is $2 million, or who cannot certify that they have complied with filing requirements for the five taxable years before expatriation, subject to certain exceptions.

Section 28.2801-3 addresses rules and exceptions applicable to the definitions of covered gift and covered bequest.  In general, the following transfers are excluded from such definitions: qualified disclaimers of property made by the covered expatriate; taxable gifts reported on a covered expatriate’s timely filed gift tax return and property included in the covered expatriate’s gross estate and reported on such expatriate’s timely filed estate tax return, provided that the gift and estate tax due is timely paid; donations to a charitable organization that would be deductible for gift or estate tax purposes; or transfers to a U.S. citizen spouse if such transfer would otherwise qualify for the gift or estate tax marital deduction.

Section 28.2801-4 provides specific rules regarding who is liable for the payment of the Section 2801 tax as well as how to compute the tax. As outlined above, a U.S. citizen or resident who receives a covered gift or a covered bequest is liable for the tax.  A domestic trust that receives a covered gift or covered bequest is treated as a U.S. citizen and is thus liable for the tax.  Of note, a non-electing foreign trust is not liable for the Section 2801 tax.  Thus, a U.S. citizen or resident who receives a distribution from a non-electing foreign trust is liable for the Section 2801 tax to the extent the distribution is attributable to covered gifts or covered bequests.  This Section also provides rules for contributions to charitable remainder trusts (CRTs) made by covered expatriates for the benefit of one or more charitable organizations and the benefit of a U.S. citizen or resident other than the charitable organization. The value of the charitable organization’s remainder interest in a CRT is excluded from the definition of a covered gift or covered bequest.  The value of the interest of the non-charitable U.S. citizen or resident in such contributions to the CRT is a covered gift or bequest and thus taxable, unless otherwise excluded.

Section 28.2801-5 provides guidance on the treatment of foreign trusts.  If a covered gift or covered bequest is made to a foreign trust, the tax applies to any distribution from that trust to a recipient who is a U.S. citizen or resident. The section also discusses how a foreign trust can elect to be a U.S. trust for purposes of Section 2801.

Section 28.2801-6 addresses how the basis rules under Sections 1014, 1015(a) and 1022 impact the determination of the U.S. recipient’s basis in the covered gift or the covered bequest.  This Section also clarifies the applicability of the GST tax to some Section 2801 transfers, among other special rules and cross-references.  Of note, unlike Section 1015(d), which generally allows gift tax paid on the gift to be added to the donee’s basis, Section 2801 does not provide for a similar basis adjustment.

Section 28.2801-7 provides guidance on the responsibility of a U.S. recipient to determine if a tax under Section 2801 is due.  The Treasury Department and IRS recognize that because the tax imposed by Section 2801 is on the recipient, rather than the donor or the estate of the decedent (that has access to the information related to whether the donor or decedent is a covered expatriate), U.S. taxpayers may have difficulty determining whether a tax is due. To aid the taxpayer, the IRS may disclose returns and return information upon request.

December 9, 2015 is the deadline for written or electronic comments to the above regulations.

BBA Event @ 11/20/15 – Assisted Reproductive Technologies, Estate Planning, Family Law and Probate

Topic: When A.R.T. is the Issue: The Impact of Assisted Reproductive Technologies on Estates and Probate

When: Friday, November 20, 2015 12:30 PM to 1:30 PM

Where: Boston Bar Association16 Beacon Street, Boston, MA

Description:  Learn about assisted reproductive technologies and its impact on estate planning, family law and probate.  After this seminar, attendees will know statutes and case laws that control ownership of genetic material, what constitutes parentage and how to dispose of embryos in estate plans.

Event Co-Sponsors: Family Law Section, Health Law Section, Estate Planning Committee

Details: For more information about this event, click here.

IRS Announces Inflation Adjustments for 2016

By, Kerry Reilly, Esq.

Income Tax:

  • Highest Tax Bracket for Estates and Trusts. An estate or trust will be subject to the highest income tax bracket and Medicare surtax if taxable income exceeds $12,400 (increased from $12,300 in 2015).
  • Foreign Earned Income Exclusion. For taxable years beginning in 2016, the foreign earned income exclusion amount under §911(b)(2)(D)(i) is $101,300 (increased from $100,800 in 2015).
  • Expatriation to Avoid Tax. For calendar year 2016, under §877A(g)(1)(A), unless an exception under §877A(g)(1)(B) applies, an individual is a covered expatriate if the individual’s “average annual net income tax” under §877(a)(2)(A) for the five taxable years ending before the expatriation date is more than $161,000 (increased from $160,000 in 2015).
  • Tax Responsibilities of Expatriation. For taxable years beginning in 2016, the amount that would be includible in the gross income of a covered expatriate by reason of §877A(a)(1) is reduced (but not below zero) by $693,000 (increased from $690,000 in 2015).

Gift Tax:

  • Annual Exclusion for Gifts. The annual exclusion for gifts remains at $14,000 for 2016.
  • Annual Exclusion for Gifts to Non-Citizen Spouse. The first $148,000 of gifts to a spouse who is not a citizen of the United States shall not be considered a taxable gift by the donor (increased from $147,000 in 2015).
  • Large Gifts Received from Foreign Persons. Gifts from foreign persons in excess of $15,671 in aggregate must be reported to the IRS (increased from $15,601 in 2015).

Estate Tax

  • Unified Credit Against Estate Tax. The basic exclusion amount for an estate of any decedent dying during calendar year 2016 is $5,450,000 (increased from $5,430,000 in 2015).
  • Valuation of Qualified Real Property in Decedent’s Gross Estate. For an estate of a decedent dying in calendar year 2016, if the executor elects to use the special use valuation method under §2032A for qualified real property, the aggregate decrease in the value of qualified real property resulting from electing to use §2032A for purposes of the estate tax cannot exceed $1,110,000 (increased from $1,100,000 in 2015).
  • Interest on Certain Portions of Estate Tax Payable in Installments. For an estate of a decedent dying in calendar year 2016, the dollar amount used to determine the “2-percent portion” (for purposes of calculating interest under §6601(j)) of the estate tax extended as provided in §6166 is $1,480,000 (increased from $1,470,000 in 2015).

See Rev. Proc. 2015-53 for more details.

Practice Fundamentals Series: Estate, Gift and GST Tax Basics for the New Estate Planner

Program Date: Wednesday, November 4, 2015

Panelists: Susan A. Robb of First Republic Bank and Danielle R. Greene of Loring Wolcott & Coolidge Trust

Program Chairs: Anne L. Warren of Brown Brothers Harriman & Co.,   Tamara Lauterbach Sturges of Egleson & Sturges, LLC, and Heidi Seely of Rackemann, Sawyer & Brewster, P.C.

Materials: Click here for panelists’ handout.

Program Topic:  Panelists provided an introduction to the estate, gift and generation-skipping transfer taxes.  The program content included a review of the key components of each tax, how the taxes related to one another, and context of the relevancy of each tax for purposes of preparing an estate plan.

Need Ethics Credits? – BBA CLE on Tues. Nov. 10th

CLE Title: Conflicts of Interest in Estate Planning and Fiduciary Representation

Time: 3:00PM – 6:00PM

Location: Boston Bar Association, 16 Beacon Street, Boston, MA

Description: This program is designed to facilitate a meaningful discussion about the many conflicts that arise (or may arise) in the context of estate planning and fiduciary litigation.  The panelists will guide the practitioners through real examples and will discuss issues to identify and ways to approach drafting to avoid some of the potential conflicts.  The panelists will also talk about best practices regarding engagement letters and conflict waivers.

Information: For more event details, including accreditation, agenda, fees, and program materials, click here.

Sponsors: Co-Chairs of the Trusts & Estates CLE Committee: Kelly Aylward of Tarlow, Breed, Hart & Rdgers, P.C., Jaclyn O’Leary of Day Pitney, LLP, and Amiel Weinstock of Thomas Brady & Associates

Proposed Changes to the Massachusetts Estate Tax

By, Kerry Reilly, Esq.

On January 15, 2015, Representative Shawn Dooley ((R), 9th Norfolk), et al., sponsored H.R. 2489 (replacing current Section 2A under Mass. Gen. Laws Chapter 65C). A hearing on the bill took place on October 20, 2015. This bill would, among other things:

  1. Repeal the current Massachusetts estate tax threshold of $1,000,000 and tie that threshold to “50 percent of the basic exclusion amount as defined in Section 2010 of the [Internal Revenue] Code” for those individuals dying on or after January 1, 2016.
  2. Allow for the exclusion of the principal residence from the Massachusetts gross estate provided the decedent was a resident of Massachusetts at the time of his/her death. The definition of “Massachusetts gross estate” has been changed to include this election.
  3. Allow the surviving spouse to apply the deceased spouse’s unused exclusion amount to his/her gross estate.   This would bring the Massachusetts estate tax exclusion in line with Federal tax laws allowing portability of estate tax exclusions between spouses.
  4. The”principal residence” and DSUEA elections would be made by the decedent’s Personal Representative on the decedent’s Massachusetts estate tax return.
  5. Lastly, the proposed bill would also simplify the tax table used to determine the Massachusetts estate tax liability, as follows:
If the Massachusetts taxable estate is: Over………… But Not OverThe Massachusetts estate tax
shall be:
$0 – $5,000,00010% of the taxable estate
$5,000,000 – $10,000,000$500,000 plus 11% of the excess over $5,000,000
$10,000,000 – $20,000,000$1,050,000 plus 12% of the excess over $10,000,000
$20,000,000+$2,250,000 plus 13% of the excess over $20,000,000

As of October 29th, no additional action has been taken with respect to this proposed bill.

The full text of the proposed bill can be found here:

BBA Event Reminder: 11/3/15 – Resolving Domicile-Related Tax Disputes Efficiently

Topic: Resolving Domicile-Related Tax Disputes Efficiently: A Review of the Bank of America Decision, Other Recent Domicile-Related Case Law

When: Tuesday, November 3, 2015 12:00 PM to 1:00 PM

Where: Boston Bar Association16 Beacon Street, Boston, MA

Description: Hear a discussion of domicile as it relates to both individuals and fiduciaries.  The panelists will address importance of domicile for income and estate tax purposes, the Massachusetts definitions of domicile and residency, and facts and circumstances that are often considered in determining domicile.  Discussion will also address the recent Appellate Tax Board decision, Bank of America, N.A. v. Massachusetts Commissioner of Revenue, and potential implications and considerations. Finally, the discussion will include New Hampshire domicile considerations associated with fiduciaries.

Event Sponsor: Scott M. Susko of McDermott Will & Emery and Brian Marks of Ernst & Young LLP, co-chairs of the State and Local Tax Committee of the Tax Section

Details: For more information about this event, click here.

REMINDER 10/30/15: BBA CLE – Conflicts – They’re Not Just for Litigators!

CLE Title: Conflicts – They’re Not Just for Litigators!

Time: 9:00AM – 12:00PM

Location: Boston Bar Association, 16 Beacon Street, Boston, MA

Description: This program is designed to facilitate a meaningful discussion about the many conflicts that arise (or may arise) in the context of estate planning and fiduciary litigation.  The panelists will guide the practitioners through real examples and will discuss issues to identify and ways to approach drafting to avoid some of the potential conflicts.  The panelists will also talk about best practices regarding engagement letters and conflict waivers.

Information: For more event details, including accreditation, agenda, fees, and program materials, click here.

Sponsors: Co-Chairs of the Trusts & Estates CLE Committee: Kelly Aylward of Tarlow, Breed, Hart & Rdgers, P.C., Jaclyn O’Leary of Day Pitney, LLP, and Amiel Weinstock of Thomas Brady & Associates

Estate Planning Brownbag Series: When a Trust Owns Real Estate — Common Issues That Cause Problems With Title And How To Avoid Them

Program Date: Thursday, October 22, 2015

Panelist: Ward P. Graham, WFG National Title Insurance Co.

Program Chairs: Kerry L. Spindler, Goulston & Storrs PC  and Sara Goldman Curley, Nutter McClennen & Fish LLP, co-Chairs of the Trusts & Estates Section’s Estate Planning Brownbag Series

Materials:  To view the program materials, click on each of the following links:

Handout 1

Handout 2

Handout 3 (part 1)

Handout 3 (part 2)

Summary of Program Topic:  The program covered common issues causing problems with titles of property coming out of a trust, including termination of the trust, and changes in trustees.  The program also sought to clarify the function of a Trustee’s Certificate under MGL c. 184, § 35, and how it can and cannot be used.  The objective of the program was to allow attendees to identify and deal with common issues that affect title to real estate held in trust and the transfer or disposition of the real estate from the trust, and to allow attendees to better plan for trusts owning real estate.

Practice Fundamentals Series: Managing Your Practice – Forming an Estate Planning Practice and Engaging New Clients

Program Date: Wednesday, October 7, 2015

Panelists: Tiffany O’Connell of O’Connell Law, LLC, and Tamara Lauterbach Sturges of Egleson & Sturges, LLC

Program Chairs: Anne L. Warren of Brown Brothers Harriman & Co.,   Tamara Lauterbach Sturges of Egleson & Sturges, LLC, and Heidi Seely of Rackemann, Sawyer & Brewster, P.C.

Materials: Click here for panelists’ outline.

Program Topic:  Panelists discussed the different methods of setting up an estate planning practice, including practice management software, drafting templates, benefits of drafting software, marketing, networking and building a client base.