Regarding U.S. persons who expatriate, classified as “Covered Expatriates”, if prior to expatriation they establish and fund a Charitable Lead Trust, open trust distribution, they (or their heirs) may be subjected to three separate taxes under the 2008 Tax Act (“HEART ACT”):
Non-Grantor Trust (30%-Withholding Tax)
(1) If the trust is a non-grantor trust, the covered expatriate is subject to 30% withholding tax (IRC Sec. 871) on the taxable portion of the distribution to the covered expatriate.
(2) If the trust is a grantor trust, a “Mark-to-Market” tax (IRC Sec.877A) on “deemed gains in excess” of $651,000 (2012), on property that an individual is considered to own as part of his world-wide estate (property considered owned through a grantor trust is included as part of his world-wide estate, were he to die on the day before his expatriation date). See: IRS Notice 2009-85, 2009-45 I.R.B. 598 (Oct. 15, 2009).
(3) IRC Sec. 2801 imposes a “succession tax”, (tax: 40%/2013), i.e. an “inheritance tax”, assessed and paid by the gift recipient, of a “covered gift or bequest” (a direct or indirect gift from a “covered expatriate”, under IRC Sec. 877A).
Under IRC Sec. 2801, for covered gifts or bequests made to trusts, the succession tax is paid as follows:
(1) For a “covered gift or bequest” made to a foreign trust, the succession tax will apply to the receipt by a U.S. person of a distribution, whether income or capital, paid by the recipient.
(2) For a “covered gift or bequest” made to a domestic trust, the succession tax is assessed and paid by the trust.
Under a charitable lead trust, the trust income is paid to charity for a term, and the remaining trust assets are paid to the designated remainder beneficiaries.
If the remainder beneficiary is a “covered expatriate”, they are subject to either a 30% U.S. withholding tax (on the taxable portion of the trust distribution) on a non-grantor trust distribution, or a “Mark-to-Market” tax on a grantor trust distribution (deemed gain in excess of $651,000).
If the remainder beneficiary is a U.S. person, they are subject to a 40% succession tax, paid by the gift/bequest recipient.
The succession tax under IRC Sec. 2801 will not apply to the following gifts/bequests:
(1) Annual exclusion gifts (under IRC Sec. 2503(b), $14,000 per donee (2013));
(2) Marital deduction gifts and bequests (to a U.S. citizen spouse);
(3) Charitable deduction gifts;
(4) Gifts to an alien spouse, subject to IRC Sec. 2503(b), 2523(i), limits $139,000 (2012);
(5) Bequests to an alien spouse, if left to a qualified domestic trust (“QDT”) under IRC Sec. 2506(d), 2056A;
(6) Taxable gift shown on a timely filed gift tax return (Form 709);
(7) Property included in the estate of a covered expatriate shown on a timely filed estate tax return (Form 706);
(8) Gifts/bequests made by a covered expatriate, during any period following expatriation, when the expatriate is again subject to tax as a citizen or resident of the U.S. (IRC Sec. 877A(g)(1)(C) and 2801(c)(1)(A);
(9) A U.S. recipient of a covered gift or bequest in calculating his income tax liability on the receipt of a taxable distribution from a foreign trust, attributable to a covered gift or bequest, will be entitled to deduct under IRC Sec. 164, the amount of tax imposed under IRC Sec.2801, that is attributable to gross income of the recipient but not to the capital portion of the distribution.