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March 11, 2026
A new reporting and tax framework is beginning to affect U.S. individuals and entities that receive gifts or inheritances from people who have previously renounced their U.S. citizenship or given up long-term green card status.
With the implementation of Internal Revenue Code §2801 and the introduction of IRS Form 708, certain transfers from such individuals known as covered expatriates may now be subject to tax at a rate of up to 40 percent.
These rules apply to transfers received beginning in 2025, with reporting obligations starting in 2026. Importantly, the provisions apply regardless of where the transfer takes place. Whenever a U.S. person receives assets from a covered expatriate, the rules may apply even if both the donor and the property are located outside the United States.
What makes this framework particularly significant is the way it shifts the traditional allocation of tax responsibility. Under the conventional U.S. estate and gift tax system, the donor or the donor’s estate typically bears the tax burden. Under Section 2801, however, the obligation shifts to the U.S. recipient of the transfer, potentially creating significant and unexpected tax exposure.
For internationally connected families, this development makes cross-border estate planning more compliance-focused than ever before.
Section 2801 was introduced in 2008 as part of the Heroes Earnings Assistance and Relief Tax Act. The provision was designed to address concerns that certain high-net-worth individuals might avoid U.S. estate and gift taxes by renouncing their citizenship or long-term residency before transferring wealth to beneficiaries in the United States.
To address this risk, the legislation created a special tax regime that applies when covered expatriates transfer wealth to U.S. persons through gifts or bequests.
For many years, however, the rule remained largely dormant because there was no formal reporting mechanism for recipients. The introduction of IRS Form 708 now provides a structured process for reporting such transfers and calculating the applicable tax. As a result, a provision that existed primarily on paper has now become an actively enforceable compliance requirement.
A covered expatriate generally refers to a former U.S. citizen or long-term green card holder who relinquishes that status and meets at least one of the following conditions at the time of expatriation:
A net worth of $2 million or more
An average annual U.S. income tax liability exceeding $206,000 (2025 indexed value) during the preceding five years
Failure to certify full U.S. tax compliance for the previous five years through Form 8854
When an individual falls into this category, U.S. persons who later receive gifts or inheritances from them may become subject to the Section 2801 tax regime.
Under Section 2801, certain transfers from covered expatriates are classified as covered gifts or covered bequests.
A covered gift generally refers to a voluntary transfer of property or assets without receiving something of equal value in return. This may include cash, real estate, stocks, artwork, or other assets.
A covered bequest refers to the transfer of property upon death, typically through a will or estate plan.
When a U.S. recipient receives such transfers from a covered expatriate, the value exceeding the applicable annual exclusion may be subject to tax at a rate of up to 40 percent.
For the 2025–2026 period, the annual exclusion amount is $19,000 per recipient. The exclusion applies separately to each recipient each year, and multiple transfers during the same year must be aggregated.
One of the most distinctive features of the Section 2801 framework is the reallocation of tax responsibility.
Under the traditional U.S. estate and gift tax system, the donor or the donor’s estate typically pays the tax. Section 2801 reverses this arrangement by placing the obligation directly on the U.S. recipient of the gift or inheritance.
With the introduction of Form 708, enforcement of this rule has become more concrete. U.S. beneficiaries receiving assets from covered expatriates may now face tax exposure even when the transfer occurs entirely outside the United States.
This structural shift makes it essential for recipients to understand the expatriate status of donors and the potential tax implications of cross-border transfers.
Consider the case of Mr. Lobo, a former U.S. citizen who renounces his citizenship and qualifies as a covered expatriate because his net worth exceeded $2 million at the time of expatriation.
Several years later, he gifts stock worth $10 million to his daughter, a U.S. citizen living in New York.
Under the Section 2801 framework, this transfer would be considered a covered gift. After applying the $19,000 annual exclusion, the remaining value of the transfer would be subject to tax at a rate of up to 40 percent.
In this situation, the daughter rather than the donor is responsible for reporting the transfer and paying the applicable tax using IRS Form 708.
If the recipient fails to report the gift or pay the required tax, the IRS may impose penalties and interest. This example illustrates how Section 2801 can create unexpected tax exposure for U.S. beneficiaries even when the donor lives abroad and the assets transferred are located outside the United States.
U.S. recipients of gifts or inheritances from covered expatriates may face several practical challenges:
Transfers may be taxed at rates of up to 40 percent
The beneficiary, rather than the donor or estate, is responsible for paying the tax
Determining expatriate status may require access to historical financial and tax information
The rules apply globally and may involve foreign real estate, private businesses, or offshore investments
Failure to file Form 708 may result in penalties, interest, and potential IRS scrutiny
Liquidity challenges may arise when inherited assets are illiquid but tax obligations arise immediately
For families with international connections, proactive planning can help manage potential exposure under Section 2801.
Reviewing potential transfers from former U.S. citizens or long-term residents at an early stage allows beneficiaries to determine whether the donor may qualify as a covered expatriate. Planning strategies may include pre-expatriation gifting, gradual use of annual gift exclusions, trust structuring, and protective filings where expatriate status is uncertain.
From a compliance perspective, recipients should ensure timely filing of Form 708 and maintain documentation supporting expatriate status and asset valuations. Coordination with cross-border tax advisors can also help reduce risks such as double taxation or conflicts with foreign inheritance tax regimes.
The introduction of Form 708 and the enforcement of Section 2801 create new obligations for U.S. beneficiaries receiving gifts or inheritances from covered expatriates.
Water & Shark assists clients by:
Conducting due diligence to determine whether a donor qualifies as a covered expatriate
Assessing potential tax exposure and identifying planning strategies
Advising on trust structures, lifetime gifting approaches, and annual exclusions
Preparing and filing Form 708 in accordance with IRS requirements
Providing ongoing monitoring and documentation support for cross-border transfers
Through these services, the firm helps transform a complex regulatory framework into a structured and manageable process while protecting family wealth.
The introduction of IRS Form 708 and the operationalization of Section 2801 represent an important development in the U.S. tax treatment of cross-border wealth transfers.
U.S. recipients of gifts and bequests from covered expatriates may face transfer tax exposure of up to 40 percent, making compliance and planning more important than ever. Determining whether a donor qualifies as a covered expatriate, maintaining proper documentation, and meeting reporting requirements are now essential aspects of international estate planning.
As global transparency standards continue to evolve, families with international ties may benefit from a proactive and well-structured approach to cross-border wealth planning.
FAQs - Frequently Asked Questions
1. Who needs to file IRS Form 708?
A U.S. person who receives a gift or inheritance from a covered expatriate may need to file the form.
2. Do these rules apply if the gift was given outside the United States?
Yes. The rules can still apply if the recipient is a U.S. person.
3. Who pays the tax under Section 2801?
The U.S. recipient of the gift or inheritance is generally responsible for the tax.
4. Are small gifts also taxed?
Not necessarily. An annual exclusion applies. For 2025–2026, the first $19,000 per recipient is generally excluded.
5. What if the donor’s expatriate status is unclear?
It may be necessary to review the donor’s tax history or consider a protective filing.
Author’s Name
Manas Shah
(Management Trainee Tax & Regulatory at Water & Shark)
Disclaimer
The views and opinions expressed in this article are solely those of the author. They do not necessarily reflect the official position, policy, or perspective of Water & Shark.
