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Overview
Scope of the chapter. This chapter addresses the tax and legal consequences of giving up United States citizenship or long-term permanent residence, and their bearing on asset protection planning. It covers the law of loss of nationality and the termination of lawful permanent residence, the tests that make an expatriate a covered expatriate, the mark-to-market tax of section 877A, the special rules for deferred compensation, tax-deferred accounts and trusts, the tax imposed by section 2801 on United States recipients of gifts and bequests from covered expatriates, the immigration consequences, the effect of expatriation on creditors, and planning before expatriation.
Why expatriation belongs in an asset protection treatise. Clients who hold substantial wealth abroad, who have family ties to other countries or who live abroad sometimes consider expatriation as part of a long-term plan. Some regard it as a means of placing themselves and their assets beyond the reach of United States courts and tax authorities. The law gives that view limited support. Expatriation changes the client's status for tax purposes and, over time, the client's presence in the United States. It does not discharge debts, judgments or tax liabilities already owed, it may itself be a taxable event of considerable cost, and the structures a client holds will be taxed on exit under rules that treat grantor trust assets as the client's own and impose withholding on distributions from other trusts. The planner who advises on protective structures must therefore understand the exit regime, both for clients who may expatriate and for structures whose beneficiaries may.
The regime in outline. A United States citizen who relinquishes citizenship, or a long-term resident who ceases to be a lawful permanent resident, is an expatriate. 26 U.S.C. § 877A(g)(2). If the expatriate meets a tax-liability, net-worth or certification test, the expatriate is a covered expatriate. Id. § 877A(g)(1). A covered expatriate is treated as having sold all property on the day before the expatriation date, with gain above an indexed exclusion taxed at once, unless payment is deferred on adequate security. Id. § 877A(a)–(b). Deferred compensation, tax-deferred accounts and interests in nongrantor trusts are subject to separate rules. Id. § 877A(c)–(f). Gifts and bequests from a covered expatriate to United States persons are taxed to the recipients at the highest gift and estate tax rate. Id. § 2801. The regime applies to expatriation dates on or after June 17, 2008; earlier expatriates remain under the former section 877. Id. § 877(h).
Relation to other chapters. The grantor trust rules and section 684 are addressed in chapter 42 (see supra ch. 42). Information reporting, including the certification of five years' compliance, is addressed in chapter 43 (see supra ch. 43). Voidable transfers before expatriation are governed by the ordinary law addressed in chapters 6 and 7 (see supra chs. 6–7). Non-United States families and clients are addressed in chapter 50 (see infra ch. 50).