Inheriting From Someone Who Renounced: The Section 2801 Tax on Gifts and Bequests From Covered Expatriates

Short version: Expatriation Tax Explained: Renouncing U.S. Citizenship

Section 2801 was enacted in 2008 as the back half of the exit-tax regime — the front half taxes the expatriate on the way out; the back half taxes the US recipients of whatever the expatriate later gives them — and it sat without regulations or a return until 2025, when final regulations and Form 708 arrived and the tax became administrable. The rule: a US citizen or resident who receives a covered gift or covered bequest — a gift or bequest from a covered expatriate, directly or indirectly, including through a trust — owes a tax equal to the value received (above the annual exclusion amount) multiplied by the highest estate tax rate in effect (40%), reduced by any foreign gift or estate tax the expatriate or estate paid on the transfer; the recipient, not the expatriate, is liable, and the recipient files Form 708 to report and pay. A covered expatriate is a person who expatriated after June 16, 2008 and met any of the covered-expatriate tests at expatriation — the net worth test, the tax liability test, or the certification test (the renunciation and green-card exit guides) — a status fixed at the expatriation date and, under the regulations, presumed for any expatriate unless the recipient can establish otherwise (the burden on the recipient, which is why the expatriate's Form 8854 is the document the family needs). What is a covered gift or bequest: any property acquired by gift from a covered expatriate, and any property acquired by reason of the covered expatriate's death — the same scope as the US gift and estate taxes — with the exceptions that matter: transfers reported on a timely filed US gift tax return (Form 709) or estate tax return (Form 706 or 706-NA) by the expatriate or the estate, on which US gift or estate tax was paid or the transfer was properly reported (the regulations exclude transfers that were subject to the ordinary transfer-tax system — so a covered expatriate who makes a taxable gift of US-situs property and files a 709 has removed that gift from section 2801); transfers to a US-citizen spouse that would qualify for the marital deduction, and to charities that would qualify for the charitable deduction; and transfers up to the annual exclusion amount per recipient per year (the same indexed figure as the gift tax annual exclusion). Trusts: a covered gift or bequest to a domestic trust is taxed to the trust as if it were a US person receiving it; a covered transfer to a foreign trust is not taxed at the trust level but is taxed to a US beneficiary on distributions from the trust attributable to the covered transfer — with an election available for the foreign trust to be treated as domestic for this purpose. The Canadian family's exposure: the corridor's covered expatriates are typically Americans who renounced from Canada (the accidental Americans and the long-term dual citizens who exited after catching up) and Canadians who abandoned green cards after eight or more years — and their US-person relatives (the child who stayed in the US, the grandchild born there, the sibling who never left) are the recipients section 2801 reaches; a Canadian parent who renounced US citizenship and later leaves an estate to a US-citizen child has created a 40% tax on the child's inheritance if the parent was a covered expatriate — a result that catches families who thought renunciation ended the US tax story. The planning that runs on the expatriate's side, before and at exit: avoid covered-expatriate status where possible (the exit guides — the compliance certification, net worth planning near the line, the dual-citizen-at-birth exception); where covered status is unavoidable, use the ordinary transfer-tax system deliberately (a covered expatriate's gifts of US-situs property reported on a 709 with US gift tax paid are outside section 2801 — the ordinary gift tax at the same 40% rate but with the expatriate's remaining exemption available, which for a non-domiciliary is only the US$60,000 estate equivalent and no gift-tax exemption on intangibles, so the planning is narrow); structure bequests to US persons through the exceptions (the US-citizen spouse, charity); and keep the Form 8854 and the covered-status determination in the estate file, because the recipient's Form 708 depends on it. The recipient's side: identify whether the donor or decedent was a covered expatriate (request the Form 8854; where unavailable, the presumption applies and the recipient may need to establish non-covered status from the expatriate's records); value the gift or bequest at receipt; apply the annual exclusion and any foreign transfer tax credit (Canada has no gift or estate tax, so the credit is usually nil for Canadian expatriates — the recipient pays the full 40%); file Form 708 by its due date (the regulations set the due date at the fifteenth day of the eighteenth month following the close of the calendar year in which the covered gift or bequest was received — a long fuse, to allow the recipient to determine covered status and value) and pay the tax; and, for trust-routed transfers, apply the domestic-trust and foreign-trust distribution rules. The effective date closes it: the tax applies to covered gifts and bequests received on or after January 1, 2025 (the regulations' effective date), so a US person who received a gift or inheritance from a covered expatriate before 2025 is not subject to the tax on it, and a covered expatriate's estate planning done before the regulations arrived is now tested against a rule with a form behind it.

Key takeaways

• The tax: 40% (the highest estate tax rate) on the value of gifts and bequests a US citizen or resident receives from a covered expatriate, above the annual exclusion, reduced by foreign transfer tax paid (usually nothing from Canada) — owed by the recipient on Form 708.
• Covered expatriate is a status fixed at exit: anyone who expatriated after June 16, 2008 and met the net worth, tax liability, or certification test — and presumed for any expatriate unless the recipient proves otherwise; the Form 8854 is the family's key document.
• The exceptions: transfers reported on a timely US gift or estate tax return (the ordinary transfer-tax system), transfers to a US-citizen spouse or charity, and the annual exclusion amount per recipient per year.
• Trusts route the tax: domestic trusts pay it on receipt; foreign trusts pass it to US beneficiaries on distributions attributable to the covered transfer.
• The Canadian family's exposure: the parent who renounced from Canada or abandoned a long-held green card and later leaves an estate to a US-person child — renunciation did not end the US tax story for the child.
• Form 708 is live for receipts from January 1, 2025, due on the fifteenth day of the eighteenth month after the year of receipt; nothing received before 2025 is taxed.

The renounced relative's estate file

For the expatriate: the Form 8854 and the covered-status determination kept permanently; the US-person heirs listed; the transfer-tax alternative (a 709 or 706-NA on US-situs gifts and bequests) evaluated against section 2801; spousal and charitable routes considered; the Canadian will's US-person beneficiaries flagged. For the US-person heir: the expatriate's status confirmed at the time of receipt; the value at receipt documented; the annual exclusion applied; Form 708 calendared eighteen months out; trust distributions traced to covered transfers. The file exists because the tax arrives at the worst moment — a bereavement — with a form nobody has heard of and a 40% rate.

Worked example

A Toronto mother, a dual citizen from birth who renounced US citizenship in 2015 with a net worth above the threshold (a covered expatriate — her Form 8854 shows it), dies in 2026 leaving C$3 million equally to two children: a daughter in Toronto (Canadian only) and a son in Chicago (a US citizen). Canada: the deemed disposition at death taxes the estate's accrued gains — no inheritance tax; the daughter's share arrives with no further Canadian tax. The son: his C$1.5 million share is a covered bequest — a bequest from a covered expatriate to a US person — and, above the annual exclusion, is subject to section 2801 at 40%: about US$440,000 of tax owed by him, on Form 708 due eighteen months after the end of 2026, with no foreign transfer-tax credit because Canada imposed none. The planning that would have changed it, had the estate file been built: the mother's US-situs assets (she held none — her estate was Canadian) could have been routed through a 706-NA if any existed; a charitable bequest for part of the son's share would have escaped the tax; and — the structural fix — the mother's estate plan could have provided the son's share through a Canadian trust with the daughter as trustee and distributions timed and sized around the annual exclusion, or provided the son a larger share of non-US-taxable assets while the daughter took the balance, equalized outside the section 2801 net. None of it was done, because the family understood renunciation as the end of the US tax relationship; the son's Form 708 was the first anyone had heard of the back half.

Official sources

The IRS explains that "individual U.S. citizens and residents, domestic trusts, and foreign trusts use Form 708 to report and pay the covered gifts and covered bequests section 2801 tax on their receipt, either directly or indirectly, of certain gifts and bequests from covered expatriates." — Internal Revenue Service, About Form 708, United States Return of Tax for Gifts and Bequests Received from Covered Expatriates, https://www.irs.gov/form708

The IRS explains that Form 8854, the "Initial and Annual Expatriation Statement," "is used by individuals who have expatriated on or after June 4, 2004." — Internal Revenue Service, About Form 8854, https://www.irs.gov/forms-pubs/about-form-8854

Practitioner note

Section 2801 is the exit tax's back half, and it waited fifteen years for a form — which arrived, and now taxes the US-person children of Canadians who renounced or abandoned long-held green cards at 40% on what they inherit. Our renounced-relative estate file starts with the Form 8854 (covered status is the whole question), routes US-person heirs through the spousal, charitable, and annual-exclusion exceptions where possible, and calendars Form 708's eighteen-month fuse — because the tax arrives during a bereavement with a form nobody has heard of.

See also: For selling a Florida home before or after a move back to Canada, see selling a Florida home before or after a move back to Canada; and browse every cross-border tax topic guide, organized by situation.

Next step

Fairlight prepares the section 2801 engagement — covered-expatriate status confirmation from the Form 8854, estate-plan structuring around the exceptions for US-person heirs, valuation and annual-exclusion application at receipt, Form 708 preparation, and trust-distribution tracing. See cross-border pricing or book a call.