Avoiding covered expatriate status has always been a priority for tax practitioners. With the introduction of section 2801 tax regulations in 2025, it’s become even more critical. Here are some tips for estate planners in light of these new regulations:
1. Review clients’ U.S. person status early. Add a question to your estate-planning questionnaire asking clients if they or anyone in their family has ever relinquished their U.S. citizenship or green card. This helps identify potential Section 2801 issues early.
2. Consider pre-expatriation trusts. If clients are planning expatriation, advise them to establish a trust at least five tax years before expatriation. Trusts need to be established five tax years or more in advance of the expatriation (that is, five years in advance of the year when United States Citizenship and Immigration Services (USCIS) Form I-407 is filed, triggering Internal Revenue Service Form 8854).
3. Plan to avoid covered expatriate status. Help clients avoid being classified as a covered expatriate by:
Reducing the estate value to $2 million or less as of the expatriation date, if possible;
Relinquishing their green card before Day 1 of Year 8 since first receiving it.
If a green card holder held their green card for less than eight years out of the last 15, the three tests under Internal Revenue Code Section 877A (tax liability, net worth and compliance tests) don’t apply, and IRS Form 8854 doesn’t need to be filed. Effectively, the expatriate escapes the test that determines whether they’re a covered expatriate. The covered expatriate status doesn’t attach.
If United States Citizenship and Immigration Services issued a green card on Dec. 30 and Jan. 1 arrives just 48 hours later, it counts as Year 2 of holding the green card.
4. Plan to avoid covered transfer status. Advise clients to use qualified disclaimers or file Form 709 (even if not required) to avoid the section 2801 tax:
Qualified disclaimers. Covered expatriates should consider using qualified disclaimers to transfer property without triggering the section 2801 tax, particularly if their ultimate beneficiary is a U.S. person.
File Form 709 (or Form 709-NA once available). Even if a gift tax return isn’t required, filing one anyway avoids the section 2801 tax by paying the gift tax instead. The gift tax is tax-exclusive and an obligation of the grantor, allowing the beneficiary to keep more in their pocket.
File Form 706 or Form 706-NA. This will qualify the tax as an estate tax instead of the section 2801 tax.
5. Investigate applicable estate and gift tax treaties. Verify whether any estate or gift tax treaties apply to the client’s situation to possibly reduce or eliminate section 2801 tax liability. Currently, the United States has the following tax treaties:
Estate and gift tax treaties with: Australia, Austria, Denmark, France, Germany, Japan and the United Kingdom.
Estate tax treaties with: Canada (Article XXIX B of the United States—Canada Income Tax Treaty), Finland, Greece, Ireland, Italy, Netherlands, South Africa and Switzerland.
6. Make a timely qualified domestic trust (QDOT) election for the spouse of a covered expatriate. Advise the surviving spouse of a covered expatriate to make a timely QDOT election.
7. Educate clients about timely filing Form 706-NA. With the final regulations now in place, filing Form 706-NA on time not only helps to avoid the estate tax penalties but also could save the client from the section 2801 tax.
The challenge, however, is that many clients are unaware they may need to file a U.S. estate tax return, so the 9-month window for filing can close quickly. Educating clients about this requirement early on is crucial to ensure they don’t miss the deadline and face additional tax liabilities.
*This article is an abbreviated summary of “Expatriation, Taxes and Estate Planning,” which appears in the June 2025 issue of Trusts & Estates.