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Citizens and green card holders who think about exiting the US are probably aware of the expatriation tax at exit. Most assets are deemed sold and taxed accordingly. However, the tax at exit does not end a covered expatriate's relationship with the IRS. The expatriation tax regime in fact includes gift and estate tax components that follow a covered expatriate for life and then after death, perhaps long after death.

These components apply to covered expatriates regardless of their previous gifting history and regardless of their net worth at death. In tax lingo, there is no lifetime gift tax exemption amount, nor is there an applicable exemption amount. US taxpayers who would never have to pay US gift or estate (inheritance) taxes may be subject to both if they expatriate. 

So before a US taxpayer decides to surrender a green card or give up US citizenship, estate planning implications should be considered--even if the taxpayer's wealth is well below the standard exemption amounts.

Section 2801.

In 2008 Congress dramatically widened the expatriation tax regime to address transfers during life (gifts) and transfers at death following expatriation in the Heroes Earnings Assistance and Relief Act of 2008 or “the HEART Act", the new  Subtitle B, Chapter 15 of Title 26 of the US Code. Under the new Chapter 15, Section 2801, certain gifts and death transfers from a covered US expatriate, otherwise US tax-free to a US citizen or US resident recipient are subject to tax. Though implementing regulations and reporting forms have not been published, the statute provides enough meat to do serious cross-border planning to address Section 2801 challenges.

Who is a Covered Expatriate?

Some US citizens are. So are other people who have been Lawful Permanent Residents (green card holders) for 8 of the 15 years prior to exit. Covered are citizens and long term green card holders:

• Children/grandchildren who remain US residents after mom and dad become covered expatriates:
  • Example: Bob and Denise Smith are Canadians who moved to the US with their young children in the 1970s. As the children grew up and left the family nest, some remained green card holders and some became US citizens. Firmly established in the US, they stayed when Bob and Denise retired and returned to Canada in 2010. Bob and Denise had accumulated about $2.5 million for their retirement, so they were classified as covered expatriates when they left the US. If the children remain US residents or citizens, gifts and inheritances they receive from their parents decades in the future may be subject to US expatriate tax.

• Children/grandchildren who become US residents after mom and dad become covered expatriates:
  • Example: Roy and Susan Slate, citizens of Canada, moved to the US as green card holders in the 1990s. They surrendered their green cards and returned to Canada to start a family and help run a growing family business in 2010. Because Susan routinely earned more than $155,000 annually in the US, the Slates were subject to a modest amount of US expatriate tax at exit. They thought nothing of it. 
    When their children left the Canadian family nest, half of them resettled in the Texas Oil Patch where they raised families of their own. Fifty years later, in 2060, Roy and Susan die in automobile accident. Roy and Susan died with a combined estate over $40 million, mostly Canadian oil stocks that had appreciated over five decades. In their Canadian wills, Roy and Susan made specific bequests to their children and grandchildren. Bequests to all children and grandchildren in the Texas Oil Patch in 2060 are subject to the expatriate tax because Roy and Susan expatriated in 2010.
• Children/grandchildren who never lived in the US but are US citizens by derivation and who remain US citizens after mom or dad becomes a covered expatriate:
  • Example: Frank Jones is a US citizen, born and raised in the US. After college, he relocated to Alberta where he met his Canadian bride, Jennifer. The Joneses settled in Alberta and started a family. In 2010, Frank decided that he was never going to return to the US and gave up his US citizenship. By that time, Frank had been earning more than $155,000 annually for more than a decade in the Oil Patch. Consequently, Frank was classified as a covered expatriate and paid a modest expatriate tax on unrealized gains in excess of the $600,000 threshold in his personal retirement accounts. 
    Forty years later, Jennifer dies. Five years after her death, Frank too dies. At the time of his death, Frank's estate was valued at $20 million including stock in numerous Oil Patch companies that had sky-rocketed in value since Frank arrived in the Oil Patch in 1985. Frank's surviving children are all shocked to learn that virtually the entire $20 million is subject to US "estate" (expatriate) tax because the children, who never set foot in the US, are US citizens by derivation.

• Heirs of non-US citizen spouses who remained US residents or reestablished US residency following their spouse's expatriation.
  • Example: Multimillionaire Bill Stone (age 70) is a US citizen, born and raised. He married Hillary (age 52), a citizen of Canada, in 2002. Bill and Hillary settled in the US with Bill's millions and Hillary obtained a green card through her marriage to Bill. In 2012, they retired to the Caribbean. At the same time, Bill gave up his US citizenship and paid US expatriation tax to avoid US tax during retirement. Hillary never understood Bill's priorities and kept her green card. Hillary spent enough time in the US each year visiting her children from a previous marriage to keep her green card and filed US resident tax returns ("Married Filing Separately") though she had virtually no income of her own. 
    
    Five years later in 2017, Bill dies. Hillary never really liked living in on a tropical island and, as a green card holder, moves back to the US with Bill's millions. Hillary faces no US expatriation tax when she inherits Bill's millions because of a special provision in Section 2801 for surviving spouses. 
    
    Hillary dies five years later. Hillary's children, who live in the US, Canada, and other countries, eagerly await their inheritance of Bill's millions. The inheritance received by Hillary's US resident children will be subject to expatriation tax. The tax was not avoided at Bill's death; it was merely deferred until Hillary's death. Keep in mind that there is no estate freeze at Bill's death: any appreciation of Bill's millions following his death is subject expatriation tax when it is received by Hillary's US children.