Form 708: The 40% Tax US Heirs Pay on Expatriate Gifts

Your parent renounced US citizenship years ago and recently passed away abroad, leaving you a $900,000 estate. Before you distribute a dollar, your estate attorney explains that you — not your parent's estate — owe 40% of that inheritance to the IRS. Under IRC Section 2801, a US person who receives a gift or bequest from a "covered expatriate" is personally liable for a 40% transfer tax on the amount received. On a $900,000 bequest, that is $352,400 due from your own funds — before you have spent a single dollar of what you inherited.

Section 2801 became law in 2008 alongside the rest of the exit tax framework, but it sat largely unenforceable for over 16 years while the IRS worked through the regulatory process. The final regulations (TD 10027) took effect January 14, 2025. Form 708 — the return US recipients use to report and pay the tax — was released by the IRS in January 2026. If you have a family member who is or may become a covered expatriate, the rules are now fully in force.

What Section 2801 Is — and Why the Recipient Pays

Traditional US gift and estate tax falls on the donor or the donor's estate. Section 2801 inverts that structure. The 40% liability falls entirely on the US person who receives the covered gift or bequest — the heir, the trust, or the beneficiary. The covered expatriate and their estate pay nothing under Section 2801 (they already faced their own exit tax under IRC 877A when they departed).

Congress designed the rule to close a planning gap: a covered expatriate who leaves appreciated assets to US heirs could otherwise pass wealth to the next generation without any US transfer-tax event, since the exit tax on departure is assessed on the covered expatriate rather than on the estate. Section 2801 ensures that the US tax system captures one final touch on those assets when they change hands to US persons.

For a broader picture of how covered expatriate status is determined and what the exit tax costs the departing individual, see our guide to the US exit tax. This article focuses entirely on the Section 2801 obligation that falls on the recipient.

Who Must Pay the Section 2801 Tax

Three categories of persons face liability under Section 2801:

Individual US Citizens and Residents

Any US citizen or US resident (defined by the substantial presence test or green card, just as for income tax) who receives a covered gift or covered bequest from a covered expatriate owes the tax directly. The tax is self-assessed: the recipient files Form 708 and pays the balance due. There is no withholding mechanism — the liability accrues at the moment of receipt and is remitted on the filing deadline.

Domestic Trusts

When a covered expatriate makes a covered gift or bequest to a domestic trust (a trust formed under US law), the trust itself is the liable party. The trust pays the Section 2801 tax before distributing to beneficiaries. Beneficiaries who receive distributions from a domestic trust that already paid the Section 2801 tax do not owe the tax again.

Foreign Trusts — Elect Domestic or Face Delayed Liability

Foreign trusts occupy the most complex position under Section 2801. A covered expatriate may hold assets in a foreign trust with both US and non-US beneficiaries. If the foreign trust does not elect to be treated as a domestic trust, the covered gift or bequest is not taxed when made to the trust — but the Section 2801 tax is deferred, not forgiven. When US beneficiaries later receive distributions from the foreign trust, each distribution is allocated between covered and non-covered assets using a "section 2801 ratio," and the US beneficiary owes 40% on their share of the covered portion.

A foreign trust can avoid this indefinite liability for its US beneficiaries by making a domestic election on Form 708. The trust files the election, appoints a US agent via Form 2848, pays any applicable tax, and becomes treated as a domestic trust for all Section 2801 purposes going forward. Once the election is in place, US beneficiaries are protected — the trust has already settled the liability.

What Is a Covered Gift or Covered Bequest?

The definitions follow the exit tax framework. A covered gift is any property acquired after June 17, 2008, by gift from a person who is a covered expatriate at the time of the gift, regardless of where in the world the property is located. A covered bequest is any property acquired after June 17, 2008, by reason of a covered expatriate's death that would have been included in their gross estate if they had been a US citizen.

Indirect transfers are included. Property received through an entity (a corporation, partnership, or LLC majority-owned by a covered expatriate), through a power of appointment, or through satisfaction of a debt that the covered expatriate forgave can all qualify as covered gifts or bequests under the regulations.

What Is Not a Covered Gift or Covered Bequest

Several categories of transfers are explicitly excluded from Section 2801:

• Spousal transfers: Transfers to the covered expatriate's US-citizen spouse, where a marital deduction would have applied had the covered expatriate remained a US citizen, are excluded. Transfers to a non-citizen spouse do not qualify for this exclusion.
• Charitable transfers: Transfers to qualified US charities that would have qualified for the charitable deduction are excluded.
• Qualified disclaimers: A US recipient who makes a timely, irrevocable, and properly executed qualified disclaimer under IRC Section 2518 is treated as if they never received the property. The disclaimed amount passes to the next taker and is not a covered gift to the disclaimant.
• Previously taxed transfers: Property that was already reported on a US gift or estate tax return filed by the covered expatriate before they expatriated is excluded from Section 2801.

Transfer Type	Section 2801 Applies?	Key Rule
Direct gift to US adult child	Yes	Taxable above $19,000 annual exclusion
Bequest to US heir at covered expatriate's death	Yes	Taxable above $19,000; Form 708 due 18 months after year of death
Transfer to covered expatriate's US-citizen spouse	No	Marital-deduction equivalent exclusion
Transfer to US charity	No	Charitable-deduction equivalent exclusion
Property disclaimed by US recipient	No	Valid qualified disclaimer eliminates recipient's liability
Indirect transfer via family LLC controlled by covered expatriate	Yes	Indirect transfers included under final regulations

How the 40% Tax Is Calculated

The Section 2801 tax is straightforward in structure, but its effective burden is higher than the nominal 40% rate implies.

The Annual Exclusion

For 2025 and 2026, each US recipient may receive up to $19,000 per year from covered expatriates without triggering a filing obligation or tax liability. This exclusion applies to the total of all covered gifts and bequests received during the calendar year, across all covered expatriate sources. After 2026, the exclusion amount adjusts annually for inflation.

If the total of all covered gifts and covered bequests received during the year from all covered expatriates is $19,000 or less, no Form 708 is required at all — with one exception: foreign trusts making domestic elections must file Form 708 regardless of the transfer amount.

The Tax-Inclusive Structure

The Section 2801 tax is tax-inclusive, meaning the 40% is calculated on the full gross amount of the covered transfer (after subtracting the annual exclusion), not on the net amount retained by the recipient after tax. This is the same structure as the estate tax and a departure from the gift tax, which is tax-exclusive.

The practical effect: a $1 million covered bequest less the $19,000 exclusion yields a $981,000 taxable amount. At 40%, the tax is $392,400 — leaving the recipient with $607,600. To receive $1 million net, the covered expatriate would need to transfer approximately $1.66 million.

Foreign Tax Credit Under Section 2801(d)

A credit is available if foreign gift or estate tax was paid on the same covered transfer. Under Section 2801(d), the US Section 2801 tax is reduced by any estate or gift tax paid to a foreign country on the same property. The recipient must attach copies of the foreign tax return and payment receipts to Form 708 to claim this reduction.

Whether this credit meaningfully offsets the 40% liability depends on the foreign country's estate or gift tax rate. Countries with no estate or gift tax (many territorial-tax jurisdictions popular with covered expatriates) provide no credit. Countries with significant estate taxes — France, Germany, Japan — may reduce the Section 2801 burden substantially on assets physically located there.

The No-Basis-Step-Up Problem

Paying the Section 2801 tax does not increase the recipient's income tax basis in the inherited assets. If a US recipient inherits $500,000 of appreciated stock with a zero cost basis from a covered expatriate — and pays $192,400 in Section 2801 tax — the income tax basis remains zero when the recipient later sells the stock. The recipient could face a second layer of capital gains tax on the full proceeds, creating effective double taxation on the same underlying appreciation. This is a planning problem that currently has no clean legislative fix.

Filing Form 708

The Form 708 instructions (December 2025) govern all Section 2801 filings. The key rules:

Who Files

The US recipient files — not the covered expatriate and not the covered expatriate's estate. Each US recipient files their own Form 708 for their own receipts. If a domestic trust receives a covered gift, the trustee files on behalf of the trust. If a foreign trust has elected domestic treatment, the trustee files Form 708 for the trust.

Filing Deadline

The general rule: Form 708 is due on the 15th day of the 18th month following the close of the calendar year in which the covered gift or covered bequest was received.

• Covered gifts and bequests received during calendar year 2025 → Form 708 due June 15, 2027
• Covered gifts and bequests received during calendar year 2026 → Form 708 due June 15, 2028

For covered bequests received at a date other than the covered expatriate's date of death (for example, residuary estate distributions that occur months after death), the deadline is the later of: the 15th day of the 18th month after the calendar year the covered expatriate died, or the 15th day of the sixth month after the calendar year the covered bequest was actually received.

Extensions are available by filing Form 7004 (Application for Automatic Extension). Late filing and late payment penalties apply under Section 6651 unless reasonable cause is established. Failure-to-file penalties can reach 25% of the unpaid tax; failure-to-pay penalties can add another 25%.

Section 2801 (Form 708) vs. Form 3520 — Key Differences

Many US expats already know about Form 3520, which reports gifts and inheritances received from foreign persons. Section 2801 and Form 3520 can overlap on the same transfer, but they are different obligations with different purposes.

Feature	Section 2801 / Form 708	Form 3520 (Foreign Gifts)
What it covers	Gifts/bequests FROM covered expatriates only	Gifts/bequests from any foreign person (NRA or foreign trust)
Tax assessed?	Yes — 40% tax due by recipient	No — reporting only; penalties for failure to file
Filing threshold	Total covered gifts/bequests exceed $19,000/year	Foreign individual gifts exceed $100,000/year; foreign trust distributions any amount
Filing deadline	15th day of 18th month after calendar year of receipt	Same due date as your income tax return (April 15, or October 15 with extension)
Penalty	Late filing/payment penalties up to 25% each	Up to 35% of gift amount for non-filing
Who is the donor	Must be a "covered expatriate" as defined under IRC 877A	Any foreign individual or trust (citizenship irrelevant)

When a covered expatriate makes a gift to a US person, both obligations can apply simultaneously: Form 3520 for the reporting requirement (no tax) and Form 708 for the actual 40% tax. Read the Form 3520 instructions and Form 708 instructions to determine when each applies. Most US recipients of covered gifts will owe both filings.

Planning Strategies for Covered Expatriates and Their US Heirs

The Section 2801 framework rewards advance planning — before the covered expatriate's status is fixed and before any transfers are made. The following strategies are most effective when addressed years in advance. None of these substitutes for advice from a qualified US international tax attorney and estate planning counsel.

1. Avoid covered expatriate status in the first place. The most complete solution to Section 2801 is ensuring the departing family member is a non-covered expatriate. If the departing person is under the $2 million net worth threshold, below the average tax liability threshold, and fully compliant on their returns, they are not a covered expatriate and Section 2801 never applies to their transfers. See the three-test framework in our expat estate planning guide.
2. Make substantial gifts before achieving covered expatriate status. Transfers made before a person becomes a covered expatriate — before the expatriation date — are not covered gifts under Section 2801. Pre-departure gifting uses the annual exclusion and lifetime gift tax exemption under normal rules, and does not trigger Section 2801 on the recipient side.
3. Use the $19,000 annual exclusion in each remaining year. After expatriation, a covered expatriate can transfer up to $19,000 per US-person recipient per year without triggering Section 2801 tax or even a Form 708 filing obligation. Spreading transfers over multiple years across multiple US recipients can pass significant wealth tax-free over time.
4. Transfer to non-US persons. Gifts and bequests to non-US persons — citizens and residents of foreign countries who are not US citizens, residents, or green card holders — are outside the scope of Section 2801 entirely. If the covered expatriate's heirs include non-US-person family members, routing transfers through them (with their separate foreign tax obligations considered) may reduce the aggregate US tax burden.
5. Use qualified disclaimers strategically. US heirs who receive a covered bequest can disclaim it under IRC Section 2518, avoiding Section 2801 liability entirely. The property then passes to the next taker in line. If the next taker is a non-US person, the disclaimer strategy eliminates the Section 2801 tax on the full amount disclaimed.
6. Structure foreign trusts with the domestic election in mind. If assets are held in a foreign trust with US beneficiaries, the trust's election to be treated as domestic for Section 2801 purposes pays the tax upfront and protects US beneficiaries from indefinite exposure on future distributions. This is generally preferable to the rolling liability created by the section 2801 ratio approach.
7. Maximize the foreign tax credit. If the covered expatriate's estate is subject to significant foreign estate or gift tax — particularly in high-tax jurisdictions like France, Germany, or Japan — coordinate the timing and structuring of the estate plan so the foreign tax credit under Section 2801(d) reduces the US Section 2801 liability as much as possible.

Checklist for US Recipients Who May Have Covered Expatriate Relatives

If you have a parent, grandparent, or other relative who has renounced US citizenship or abandoned a long-term green card, verify these points now — not when an estate distribution appears:

• Confirm whether your relative is a covered expatriate (did they meet the $2M net worth test, the $206,000 tax liability test, or fail to certify compliance on Form 8854?)
• If yes, understand that any gift or bequest you receive triggers a 40% tax payable by you personally
• Check whether any foreign trust holding assets for your benefit has made the domestic election under Section 2801
• Research whether the jurisdiction where the covered expatriate lives imposes estate or gift tax — that amount may offset your Section 2801 liability via the foreign tax credit
• Flag the Form 708 deadline in advance: June 15 of the second year following the year you receive the transfer
• Consider whether a qualified disclaimer — refusing the inheritance — is more advantageous than paying the 40% tax, especially for large illiquid transfers
• Engage a US international tax attorney before any actual transfer is made or accepted

Conclusion

Section 2801 sat dormant for 16 years, but it is now fully operative. The final regulations took effect January 14, 2025, Form 708 is in circulation as of January 2026, and 2025 transfers will require filing by June 15, 2027. For any US person with a covered-expatriate parent, grandparent, or other relative — or for covered expatriates themselves planning their estates — the 40% recipient tax can no longer be treated as a theoretical risk. The planning strategies above work. They require lead time. The window to act is open now, before transfers occur and choices close.

Data Notes / Sources Checked

Data note: Section 2801 rules, the $19,000 annual exclusion, the 40% tax rate, and the Form 708 deadline were verified against IRS instructions as of June 2026. The annual exclusion is inflation-adjusted after 2026 and may change. The highest estate tax rate (currently 40%) sets the Section 2801 rate and would change if Congress modifies the estate tax.

• Cornell LII — 26 U.S. Code § 2801 (full statute text)
• IRS — Instructions for Form 708 (December 2025)
• Federal Register — Section 2801 Final Regulations (effective January 14, 2025)
• eCFR — 26 CFR Part 28 (Section 2801 regulations in full)
• IRS — Form 708 (December 2025 version)