The ABCs Of Expatriation In These Chaotic Instances – Tax

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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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