Tax Law Income

The ABCs Of Expatriation In These Chaotic Occasions – Tax

December 11, 2020
Jason Wilson

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Highlights

  • Expatriation has increased significantly in 2020. The latest

    U.S. Department of the Treasury Report reflects that a record 6,047

    individuals expatriated during the first three quarters of 2020. In

    addition, 834,000 “green card” holders became U.S.

    citizens in FY 2019, which reflects an 11-year high.
  • Why are so many individuals expatriating? Perhaps it is because

    we live in chaotic times, ranging from the pandemic to the

    contentious presidential election and transition, among other

    reasons. Further, U.S. taxpayers increasingly are considering

    moving a portion of their financial portfolios offshore for

    diversification and to facilitate global trading.
  • The increase in expatriation also has caught the attention of

    the Treasury Inspector General for Tax Administration (TIGTA),

    which, in a recent report, emphasized that the Internal Revenue

    Service (IRS) should have controls in place to better enforce U.S.

    tax and reporting provisions relating to expatriates.
  • In view of the significant uptick in expatriation activity,

    this Holland & Knight article reviews in Q&A format the

    essential elements of expatriation from an immigration and tax

    perspective.

As discussed in Holland & Knight’s previous alert,

“TIGTA Tasks IRS with Enhanced Enforcement of

Noncompliant Expatriates” (Nov. 23, 2020), expatriation

has increased significantly in 2020. The latest U.S. Department of

the Treasury Report reflects that a record 6,047 individuals

expatriated during the first three quarters of 2020. This compares

to the previous annual record in 2016, when 5,411 individuals

expatriated. Interestingly, going the other way, 834,000

“green card” holders became U.S. citizens in FY 2019,

which reflects an 11-year high in new oaths of citizenship.

The increase in expatriation caught the attention of the

Treasury Inspector General for Tax Administration (TIGTA), which,

in a report issued on Sept. 28, 2020, emphasized that the Internal

Revenue Service (IRS) should have controls in place to better

enforce U.S. tax and reporting provisions relating to

expatriates.

Why are so many individuals expatriating? Perhaps it is because

we live in chaotic times: the pandemic; the economy, social, health

and climate issues; the oppressive worldwide U.S. taxation and

reporting systems and the impact of the U.S. tax rules on so-called

“Accidental Americans”; Foreign Account Tax Compliance

Act (FATCA) and, most recently, the contentious presidential

election and transition.1 Further, U.S. taxpayers

increasingly are considering moving a portion of their financial

portfolios offshore for diversification and to facilitate global

trading.

As a result of the increase in expatriations and TIGTA’s

report admonishing IRS to have better controls and enforcement of

expatriations, in this article we review in Q&A format the

essential elements of expatriation from an immigration and tax

perspective.

I. U.S. Immigration Law Aspects of Terminating U.S.

Citizenship

Q1. How Do I Terminate U.S. Citizenship?

Answer.

  • U.S. citizenship can be terminated through several methods,

    which include renunciation and relinquishment. This article

    considers only the renunciation of U.S. nationality abroad, which

    is the most unequivocal way by which an individual can manifest an

    intention to relinquish U.S. citizenship.
  • The renunciation method requires a voluntary choice and an

    understanding of the consequences.
  • Under this method, a U.S. citizen must appear in person before

    a U.S. consular or diplomatic officer in a foreign country and sign

    an oath of renunciation of U.S. citizenship.
  • Renunciation must be in person and cannot be done by mail,

    electronically or through agents.
  • A Certificate of Loss of Nationality (CLN) documents the loss

    of U.S. nationality. A CLN is completed by a consular official and

    sent to the U.S. Department of State for review and approval. U.S.

    citizenship is terminated only upon approval of a CLN, which is

    retroactive to the date of the oath of renunciation.
  • Comment.  In view of the pandemic, it may not be

    possible to quickly or easily schedule an appointment at an embassy

    or consulate because of long delays in scheduling appointments, the

    closure of some embassies or consulates or because some embassies

    or consulates are not handling interviews during the pandemic. As

    mentioned above, renunciation must be in person.

Q2. What Are the Consequences of Terminating U.S.

citizenship?

Answer.

  • Unless the former citizen possesses a valid foreign nationality

    or citizenship, he or she may be rendered stateless, and thus lack

    the protection of any government. The lack of a second foreign

    nationality or citizenship will also likely lead to difficulty in

    traveling as the individual does not have a passport from any

    country, and otherwise result in severe hardships.
    • Thus, prior to renunciation, ensure that

      the U.S. citizen lawfully obtained and still retains another

      nationality or citizenship. This can be done 1) by reason of birth

      outside the U.S., 2) through parents or grandparents (at birth or

      later), 3) through naturalization, or 4) through investment.
      • “Golden Visa” refers to immigration programs of

        countries that enable high-net-worth (HNW) individuals to obtain

        residence or citizenship in another country simply by purchasing a

        house in the country or making a significant investment or

        donation. If the immigrant pursues a Golden Visa, he or she must be

        careful to obtain what he or she expected.
      • The Organisation for Economic Co-operation and Development

        (OECD), after analyzing more than 100 citizenship or residence by

        investment schemes, cautioned that a number of these schemes pose a

        high risk to the integrity of the Common Reporting Standard and of

        tax abuse.
  • Other Consequences.
    • Termination of citizenship is irrevocable once approved, unless

      duress or lack of understanding can be proven.
    • Former U.S. citizens have no right to visit, work or reside in

      U.S. and have no advantage over other noncitizens in applying to do

      so.
    • Former U.S. citizens are required to obtain a visa to travel to

      the United States or show that they are eligible for admission

      pursuant to the terms of the Visa Waiver Program. If unable to

      qualify for a visa, a former citizen could be permanently barred

      from entering the U.S. 
    • If the U.S. Department of Homeland Security determines that the

      renunciation is motivated by tax avoidance purposes, the former

      citizen could be found to barred from entry into the United States

      through the application of the so-called Reed Amendment, adopted in

      1996.
      • It should be noted that poor drafting and restrictions on IRS

        sharing of taxpayer information have blocked implementation, since

        no regulations, policy guidance or procedures have been issued to

        implement the law.
      • Nonetheless, a number of former citizens at the border have

        been denied entry initially but overcame that denial; others have

        been interrogated about their reasons for expatriating.
      • Note, in June 2013, Sens. Chuck Schumer (D-N.Y.), Jack Reed

        (D-R.I.) and Bob Casey (D-Pa.) introduced amendments to the

        immigration reform bill to deny entry to “Covered

        Expatriates” who expatriated since 2008; these amendments were

        never enacted.
  • Impact on children
    • A child who became a U.S.

      citizen before the expatriation of a

      parent remains a U.S. citizen unless the child was born abroad and

      parent’s expatriation was retroactive to a date prior to the

      child’s birth.
    • A child born abroad to a former U.S. citizen does not obtain

      U.S. citizenship from the expatriated parent.
  • Names of expatriates are published in Federal

    Register.
  • Expatriates cannot purchase or possess firearms in the

    U.S.
  • Comments.
    • Prior to expatriation, it is important for the expatriating

      U.S. citizen to consider options for return to the U.S. in the

      future, such as for medical care, for career opportunities, to care

      for aging parents, to reside near adult children in old age or for

      other reasons.
    • Ensure expatriating U.S. citizen is not “excludable”

      from the U.S.; e.g., criminal convictions, prior immigration

      violations, terrorism and medical exclusion grounds (which may

      include arrest for driving under the influence of alcohol, even if

      not convicted).

II. U.S. Tax Law Aspects of Terminating U.S. Citizenship

Q1. Background: Who Is Impacted by the U.S. Expatriation

Law?

Answer.

  • Expatriation tax provisions have been in the U.S. Internal

    Revenue Code (Code) since 1966.
  • Until 1996, expatriation tax provisions applied only to U.S.

    citizens relinquishing U.S. citizenship.
  • Beginning in 1996, the U.S. anti-expatriation provisions were

    extended to apply not only to U.S. citizens but also to certain

    “green card” holders classified as “long-term

    residents,” provided such persons are Covered

    Expatriates.” See Section III, infra, contains a

    discussion of the special expatriation rules applicable to

    “green card” holders and planning considerations.
  • Please note that this article discusses only the Code’s

    income and estate and gift tax expatriation provisions applicable

    to individuals who are Covered Expatriates and expatriate on or

    after June 17, 2008, and not to earlier expatriation

    provisions.

Q2. What Does the Term “Expatriate” Mean?

Answer.

  • A U.S. citizen who relinquishes citizenship. Also encompassed

    within that term, but not discussed herein, is the renunciation of

    citizenship and the loss of U.S. citizenship when a U.S. court

    cancels a naturalized citizen’s certification of

    naturalization.
  • A “long-term” resident of the U.S., who ceases to be

    a lawful permanent resident of the U.S.; see Section III, Q2

    below.

Q3. What Are the Principal Code Sections and Precedent Dealing

with Expatriation?

Answer.

  • Section 877A.  The so-called

    “exit” tax, dealing with the income tax consequences to

    “Covered Expatriates,” definitions and operating

    rules.
  • Section 2801.  Containing the gift and

    estate tax consequences applicable to a “Covered

    Expatriate.” Proposed Regulations were issued in 2015, more

    than seven years after Section 2801 became law.
  • Section 6039G.  Containing the IRS Form

    8854 compliance provisions.
  • Notice 2009-85.  Providing guidance for

    expatriates under Section 877A.

Q4. Who Is a Covered Expatriate?

Answer.

  • A “covered expatriate,” defined in Q2 of this

    Section, is someone who meets any of the following three

    tests:
    • The Tax Liability Test. An expatriate who has an average

      annual net income tax liability  for the five

      preceding taxable years ending before the expatriation date that

      exceeds a specified amount adjusted for inflation.

      For 2020, the amount is $171,000.
    • The Net Worth Test. An expatriate who has a net worth of

      $2 million or more, but not adjusted for inflation as of the

      expatriation date.
    • The Certification Test. An expatriate who fails to certify,

      under penalties of perjury, compliance with all 

      U.S. federal tax obligations for the five taxable years preceding

      the taxable year that includes the expatriation date, including,

      but not limited to, obligations to file income tax, employment tax,

      gift tax and information returns, if applicable, and obligations to

      pay all relevant tax liabilities, interest and penalties. This

      certification is made on IRS Form 8854 and must be filed by the due

      date of the taxpayer’s federal income tax return for the

      taxable year that includes the day before the

      expatriation. 

Comments.

  • An individual who otherwise does not meet the Tax Liability

    Test or the Net Worth Test nonetheless is a “Covered

    Expatriate” if the individual cannot satisfy the Certification

    Test.
  • Note, the certification of U.S. federal income tax obligations

    under the Certification Test are those under U.S.C. Title 26

    (Internal Revenue Code).
  • Compliance with Report of Foreign Bank and Financial Accounts,

    so-called “FBAR” obligations arise under U.S.C. Title 31

    (Money and Finance) and thus are not part of the above U.S.C. Title

    26 Certification Test.
  • If a U.S. citizen or resident alien is not compliant with his

    or her other U.S. federal income tax

    obligations or  FBAR filing obligations, there

    are various IRS programs to remediate that non-compliance.
  • Exceptions:
    • The expatriate became at birth a U.S. citizen and a citizen of

      another country and, as of the expatriation date, continues to be a

      citizen of, and is taxed as a resident of, such other country, and

      has been a U.S. resident for not more than 10 taxable years during

      the 15 taxable year period ending with the taxable year during

      which the expatriation date occurs;
      • To come within this foreign residency exception, the individual

        must be a resident of the country in which the individual was born

        in (and not of another foreign country).

or

  • The expatriate relinquishes U.S. citizenship before age

    18½ and has been a U.S. resident for not more than 10

    taxable years before the date of relinquishment.
  • Comment. There are no exceptions to Covered Expatriate

    status for long-term residents.

Q5. What Is the Expatriation Date?

Answer.

  • It is the date an individual relinquishes U.S. citizenship or,

    in the case of a long-term resident of the United States, the date

    on which the individual ceases to be a lawful permanent resident of

    the U.S.
    • For a U.S. citizen who renounces U.S. citizenship, the

      expatriation date is the date that the individual signs the oath of

      renunciation before a diplomatic or consular officer of the U.S.,

      provided that the renunciation is subsequently approved by the

      issuance of a CLN.
    • For a long-term resident, the expatriation date is the date of

      cessation of lawful permanent residency. That can occur:
      • through an administrative revocation,
      • a judicial determination of abandonment, or
      • commencement as a resident of a foreign country under the

        provisions of a U.S. bilateral income tax treaty, provided that the

        individual waives treaty benefits, and notifies the IRS of such

        treatment on IRS Forms 8833 and 8854.

Q6. Income Tax Expatriation Provision: What Is the So-Called

“Mark-to-Market”/Exit Tax2

Answer.

  • General Rule. Section 877A generally imposes a

    “mark-to-market” income taxation regime on Covered

    Expatriates, which results in the deemed sale of worldwide assets

    (except for three categories of assets) on the day before the

    expatriation date. The gain is taxed at applicable ordinary or

    capital gains rates on gains in excess of $600,000 (indexed for

    inflation; $737,000 for 2020).
    • Operating Rules:
      • Any gain arising on the deemed sale is taken into account for

        the taxable year of the deemed sale notwithstanding any other Code

        provision.
      • Any loss from the deemed sale is taken into account for the

        taxable year to the extent otherwise provided in the Code (except

        for the Code wash-sale rules, Section 1091).
      • All nonrecognition deferral and tax payment extensions are

        terminated as of the day before expatriation.
      • The determination of ownership and valuation of assets is based

        on estate tax principles.
      • An expatriate can elect to defer tax on an asset-by-asset basis

        if “adequate security” is provided (with a 30-day cure

        period). Deferral continues until asset sold/transferred or

        taxpayer dies, if sooner. The taxpayer must agree to waive tax

        treaty benefits; and interest accrues on deferred tax at the Code

        underpayment rate.
      • Long-term residents have a basis step-up (but not basis

        step-down) for purposes of calculating gain under the

        mark-to-market taxing regime. Note, the resident individual may

        elect not to have this step-up in basis apply.

Q7. What Assets Are Excluded from the Deemed Sale Rule and How

Are They Taxed?

Answer.

  • Deferred Compensation Items. “Deferred Compensation”

    is broadly defined to include all types of employer retirement

    plans, including qualified, nonqualified retirement plans, as well

    as foreign plans and the right to future property transfers that an

    individual is entitled to receive in connection with the

    performance of services to the extent that amounts were not

    previously includible in taxable income. Not included: deferred

    compensation attributable to non-U.S. services performed while

    taxpayer was not a U.S. resident. Retirement plan payments are

    excepted from early distribution penalties.
    • Taxation.
      • “Eligible Deferred Compensation” (i.e., U.S. payor):

        subject to 30 percent withholding tax on taxable portion under

        Section 871 rules.
      • “Ineligible Deferred Compensation” (i.e., non-U.S.

        payor): present value and includible income on day prior to

        expatriation date at marginal tax rates (unless non-U.S. payor

        elects to be treated as a U.S. payor).
  • Specified Tax Deferred Accounts. These include the following

    types of accounts:
    • Individual retirement plan (including rollover IRAs).
    • Qualified tuition program.
    • Coverdell education savings account.
    • Health savings account.
    • Archer Medical Savings Accounts (MSAs).
  • Taxation. On day prior to expatriation date.
  • Non-Grantor Trusts. Any trust of which taxpayer is not the

    grantor immediately prior to expatriation date. Includes trusts

    that are grantor trusts as to other person, Code Section 678.
    • Taxation.
      • Post-expatriation distribution from non-grantor trust in which

        taxpayer considered to have beneficial interest prior to

        expatriation subject to 30 percent withholding tax on the

        “taxable portion” under Section 871 rules; there is no

        time limit on the taxation of distributions.
      • Special Rules.
        • Non-grantor trust recognizes gain on distribution of

          appreciated property.
        • Taxpayer deemed to waive any treaty benefits, unless obtains

          special IRS ruling to have ascertainable value of beneficial

          interest includible in income on day prior to expatriation

          date.
        • If non-grantor trust becomes grantor trust after expatriation,

          deemed treatment as taxable distribution.
        • Potential foreign tax credit issues under Section 906.

Q8. What Are the Section 877A Compliance

Requirements3

Answer.

  • IRS Form 8854 (Initial and Annual

    Expatriation Statement). The form must be timely filed with final

    income tax return. If it is not, the former citizen is treated as a

    Covered Expatriate. Form must be filed also for eligible deferred

    compensation items, beneficial interests in non-grantor trusts and

    for taxpayers who deferred payment of tax.

On Sept. 6, 2019, the IRS announced a new procedure entitled

“Relief Procedure for Certain Former Citizens,” to enable

certain non-compliant U.S. citizens who relinquish their U.S.

citizenship to become U.S. tax compliant. The procedure has a

narrow scope applicable to non-willful former citizens who owe

$25,000 or less in back taxes and with net assets of less than $2

millio4

  • IRS Form W-8CE (Notice of Expatriation

    and Waiver of Treaty Benefits) required to be filed in connection

    with items excepted from mark-to-market rule, by earlier of first

    post expatriation distribution or 30 days after expatriation

    date.
  • Income Tax Returns.
    • Year of Expatriation. A Covered Expatriate required to file a

      dual-status return if he/she was a U.S. citizen or long-term

      resident for only part of the taxable year that includes the day

      before the expatriation date.
      • A dual-status return requires the Covered Expatriate to file an

        IRS Form 1040NR (U.S. Nonresident Alien Income Tax Return) with an

        IRS Form 1040 (U.S. Individual Income Tax Return) attached as a

        schedule.
      • If the Covered Expatriate’s expatriation date is Jan. 1,

        then filer is not required to file a dual-status return.
    • Subsequent Years.  If Covered Expatriate does not

      have any U.S. source income or it is fully withheld at source,

      there is no requirement to file IRS Form 1040NR for that particular

      year. 

Q9. Estate and Gift Tax Expatriation Provisions: How Do They

Apply5

Answer.

  • General Rule.  Under Section 2801, U.S.

    citizens or residents receiving “covered gifts or covered

    bequests” from a Covered Expatriate will be taxed at the

    highest applicable gift or estate rate (40 percent in 2020).
    • “Covered gift or covered bequest.” Property that is

      acquired directly or indirectly by gift from, or by reason of the

      death of, a person who, at the time of the acquisition or death,

      was a Covered Expatriate.
    • A gift or bequest includes a distribution from the income or

      corpus of a foreign trust to a U.S. person attributable to a

      “covered gift or covered bequest” made to a foreign

      trust.
    • A “covered gift or covered bequest” to a domestic

      trust (a U.S. citizen) is a gift to a U.S. person and taxable to

      the trust. Note, an election exists for a foreign trust to elect to

      be taxed as a domestic trust.
    • An issue arises as how the term “U.S. resident” is

      defined – whether that term is defined under the domicile

      concept of Subtitle B (Estate and Gift Taxes) or the income tax

      rules (“substantial presence” and “green card”

      tests).
    • No time limit on the imposition of gift or estate taxes to U.S.

      recipients under Section 2801.
  • Exceptions.
    • Amount of annual gift tax exclusion ($15,000), per person.
    • Gifts or bequests entitled to marital or charitable

      deductions.
    • A “covered gift “if reported on a timely filed gift

      tax return.
    • Property included in a Covered Expatriate’s gross estate

      and reported on a timely filed federal estate tax return.
    • The U.S. tax on a “covered gift or covered bequest”

      is reduced by any foreign gift or estate tax paid on such gift or

      bequest.
  • Effective Date.
    • Notice 2009-85 provided that the reporting and tax obligations

      for “covered gifts or covered bequests” received would be

      deferred, pending the issuance of guidance.
    • Proposed Regulations under Section 2801 were issued by IRS on

      Sept. 9, 2015 and provided that they would apply on or after the

      date of final publication.
  • Comment.
    • U.S. recipients have the responsibility to determine whether a

      gift or bequest received is a “covered gift or covered

      bequest” and have the responsibility of paying the tax under

      Section 2801.
      • A U.S. taxpayer may request that the IRS disclose the return of

        a donor or decedent expatriate to assist the U.S. person in

        determining that person’s tax obligations. If a living

        expatriate donor does not authorize the IRS to release his or her

        relevant return to a U.S. citizen or resident, a rebuttable

        presumption arises to the effect that the expatriate donor is a

        Covered Expatriate and that each gift is a “covered

        gift.”
    • The Section 2801 tax is not reduced by the gift tax unified

      credit or the estate tax unified credit.
    • There is no correlation between the amount of property subject

      to the “exit” tax or whether the “covered gift or

      covered bequest” is composed of U.S. or foreign situs

      property.
    • Does Section 2801 override bilateral estate or gift tax

      treaties? The Proposed Regulations do not expressly state that

      treaties are not overridden, and the legislative history is silent

      on this point.

III. Application of U.S. Tax Expatriation Provisions to

“Green Card” Holders

Q1. Who Is a “Green Card” Holder?

Answer.

  • The following individuals are deemed to be “green

    card” holders:
    • An alien who has been granted authorization to live and work in

      the United States on a permanent basis. A permanent resident card

      (“green card”) is issued by the U.S. Citizenship and

      Immigration Service after admission and is later mailed to the

      alien’s U.S. address.
    • After entering the U.S. on an immigrant visa, the alien is

      granted Permanent or Conditional Resident status.
    • An individual in possession of a Permanent Resident Card

      (I-551), which is proof of lawful permanent resident status in the

      United States. The card also serves as a valid identification

      document and proof that the alien is eligible to live and work in

      the United States.
  • Comment.  Green card holders need to be aware

    that taking a treaty tie-breaker position to file as a nonresident

    alien for U.S. income tax purposes could adversely impact their

    immigration status and cause an unintended expatriation.

Q2. Who Is a Long-Term Resident?

Answer.

  • Any individual (other than a U.S. citizen) who has been a

    lawful permanent resident of the United States (a “green

    card” holder) in at least eight out of the last 15 taxable

    years ending with the year in which the “long-term resident

    expatriated” (i.e.,ceases to be treated as a lawful permanent

    resident of the United States).

Unlike U.S. citizens, U.S. “green card” holders can

expatriate involuntarily, by having their “green card”

revoked for abandonment, criminal conviction or other deportable

offenses.

  • Revocation for Abandonment. A “green card” holder who

    takes up residence abroad risks having the green card revoked for

    abandonment. This can occur if the “green card” holder is

    absent from the U.S. continuously for more than one year or absent

    extensively (more than 50 percent) with only short visits to U.S.

    Visiting the U.S. once or twice per year, owning a personal

    residence or bank/retirement account in U.S. does not protect

    against abandonment.
    • A re-entry permit preserves “green card” status while

      residing abroad.
    • A “treaty tie-breaker” is deemed to have expatriated

      as of the date of “commencement” of foreign residence

      under a treaty unless the individual waives treaty benefits and

      notifies the IRS on IRS Forms 8833 and 8854.
  • Relinquishment. A “green card” holder can voluntarily

    relinquish his or her “green card” by filing Form I-407

    (Record of Abandonment of Lawful Permanent Resident Status) and

    avoid coming within the eight out of 15-year test by surrendering

    his/her “green card” before the first day of Year

    Eight.

Computation Mechanics:

    • Determine the 15-year period that ends when the “green

      card” is relinquished.
    • Note, if an individual is a lawful permanent resident of the

      U.S. at any time during the calendar year, then that individual is

      a lawful permanent resident for that year. For example, arrival in

      the U.S. on Dec. 31 counts as a full year as does departure from

      the U.S. on Jan. 1.
    • A “green card” holder that is a lawful permanent

      resident for eight out of 15 years is viewed as expatriating for

      tax purposes if the individual 1) voluntarily abandons his/her

      “green card”; 2) elects to be a resident of a foreign

      country under treaty tie-breaker provisions and does not waive

      treaty benefits; or 3) the government administratively or

      judicially terminates alien’s “green card”

      status.
  •  Tax planning considerations for “green card”

    holders:
    • Leave U.S. and surrender “green card” by filing Form

      I-407 before first day of eighth year.
    • If “green card” holder desires to return to foreign

      home for a period of time without jeopardizing “green

      card” status, obtain re-entry permit in advance of trip.
    • If “green card” holder” wants to continue to

      reside in U.S. but wants to avoid long-term resident

      classification, timely surrender “green card” and obtain

      nonimmigrant visa status.
    • Become a U.S. citizen. A U.S. citizen can reside abroad forever

      without losing citizenship.
  • Comment. An alien who is in the U.S. on a nonimmigrant

    visa and is a U.S. resident under the “substantial

    presence” test cannot  become a

    long-term resident subject to the U.S. expatriation rules.

IV. Planning Considerations

Q1. What Should You Consider Before Expatriating?

Answer.

  • Obtain timely and accurate immigration and tax advice.
  • Have a valid second nationality or citizenship.
  • Carefully identify ownership and value of all assets and

    liabilities.
    • Consider how property rights impact who owns which assets.
      • Pre or post-nuptial agreement?
    • Does a common law or community property regime apply?
  • Evaluate the cost of Section 877A and Section 2801 taxes

    compared to remaining a U.S. taxpayer.
    • Exit tax – a one-time cost.
    • Continuing as a U.S. citizen – incurs lifetime annual

      income taxes and potential estate tax at death.
    • How does expatriation impact multigenerational wealth planning?

      This is particularly important if the expatriate’s heirs intend

      to remain U.S. citizens.
  • If potential expatriate is not in compliance with the

    Certification Test, consider how to remediate

    non-compliance prior to expatriation

    (and concurrently remediate for any non-compliance with

    FBARs).

Q2. Some Planning Ideas

Answer.

  • Gifting to Reduce Net Worth.  Reduce net worth

    for purposes of the Net Worth Test, but must be carefully

    done.
    • Consider use of unified credit prior to expatriation since

      credit not available post-expatriation.
    • Consider use of non-grantor irrevocable trusts. Avoid

      “string” provisions; e.g., estate tax retained interest

      and general power of appointment provisions.
    • Consider gifts to spouse before

      expatriation; viz.,  use of the unlimited gift

      tax marital deduction provided your U.S. citizen spouse is not

      expatriating, or gifting to noncitizen spouse (2020 amount is up to

      $157,000).
    • Carefully consider timing of gifts close to expatriation.
      • IRS Form 8854 Instructions requires furnishing balance sheet

        information “(i)f there have been significant changes in your

        assets and liabilities for the period that began 5 years before

        your expatriation and ended on the date that you first filed Form

        8854, you must attach a statement explaining the

        changes.”)
    • For long-term residents planning to expatriate, consider

      possible planning opportunities related to different definition of

      resident for income tax purposes versus definition for gift tax

      purposes and potential for gifting.
      • Caveat: This planning idea requires careful evaluation

        in the overall context of the immigration and tax provisions

        related to expatriation.
  • Techniques to Minimize Gain or Income Under Exit

    Tax.
    • Exit tax is based on the fair market value (FMV) of property.

      Consider traditional estate planning techniques and vehicles, such

      as family limited partnerships, where valuation discounts may be

      available. Here, be sensitive to timing. Planning should be done

      sufficiently in advance of expatriation.
    • Sale of Residence. Consider selling residence prior to

      expatriation if otherwise qualify for Section 121 exclusion of

      $250,000 ($500,000 for certain married taxpayers).

Prior to implementing any planning ideas, it is

important to consult with your immigration and tax

advisors.

Conclusion

For more information and questions regarding expatriation from

an immigration and tax perspective, contact the authors.

The authors acknowledge the contribution of Steve Trow,

co-founder and now retired partner of Trow & Rahal, P.C., who

contributed to earlier iterations of some of the content in Section

I of this article.

Footnotes

1 See “Demand for second passports and citizenship

soars,” International Investment, Dec. 1,

2020.

2 See “The Tax Rules Just Changed: Emotions Aside, Does

Expatriating Make Financial Sense?,” Kevin E.

Packman, Journal of Taxation, August

2008.

3 See “The IRS Approach to Dealing with the Expat

Community is Schizophrenic,” Kevin E.

Packman, Estate Planning Journal, January

2020.

4 See Holland & Knight’s previous alert, “New IRS Procedure Provides Favorable Path for

Non-Compliant Expatriates to Become Tax Compliant,” Sept.

11, 2019.

5 See “IRS Provides Some Guidance on the New Expatriation

Exit Tax,” Kevin E. Packman and Summer A.

LePree, Journal of Taxation, March 2010.

The content of this article is intended to provide a general

guide to the subject matter. Specialist advice should be sought

about your specific circumstances.

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