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June 24, 2013 - Phil Hodgen

Inheritance, dual citizens, and expatriation

We get questions. (Ask a question here). Today I received a question from a dual citizen (USA plus another country) about an expected inheritance from her U.S. citizen parents:

For those of us who are dual citizens living abroad, and will inherit from our US parents someday, what happens with Estate Tax? Does it matter if the dual citizen has given up her US citizenship by that time?

There must be a tax treaty (I am in *******) but I can’t find this specific case in anything I have read, and yet it’s got to be pretty common. Mostly I find stuff about the expatriate dying and what laws apply then. I want to know about the recipient of the inheritance.

TL;DR

No worries. As long as her parents keep their U.S. citizenship and they have a net worth under $10,500,000, all inheritances to the dual citizen child will untaxed by the United States. And if the dual citizen child terminates her U.S. citizenship and reverts to a single citizenship, the same result will still be true–no estate tax imposed on the parents’ assets, and no U.S. tax imposed on the ex-U.S. citizen child when she inherits assets.

Two Taxes

There are two taxes that we have to think about: (a) estate tax; and (b) the Section 2801 exit tax.

Estate Tax

The estate tax is imposed on the deceased person’s wealth. In the example from the reader, this means that her parents’ assets either are (or are not) subjected to the estate tax. Current rules say that if her parents died simultaneously there would be no estate tax on the first $10,500,000 of assets they own.

This is standard stuff. The estate tax is imposed without caring whether the people who inherit from you are citizens or noncitizens. Only if you leave stuff to charity do we care about the identity of the recipient.

My reader is not particularly concerned about the estate tax being imposed on her parents. Let’s assume they have a net worth under $10,500,000, so there will be no estate tax imposed when they die.

Section 2801 Tax

The second–and more pernicious–tax is the tax imposed on people who receive gifts from covered expatriates. I refer to it as the “Section 2801 tax” because it is imposed by Section 2801 of the Internal Revenue Code.

Note that there are two conditions that must both be satisfied in order for this tax to be imposed:

  • The person making the gift (or leaving the bequest) must be a covered expatriate; and
  • The person receiving the gift (or receiving the bequest) must be a U.S. citizen or resident.

The reader assumed that her parents would not give up their citizenship, so this means that the first condition fails. Therefore, the Section 2801 tax cannot be imposed. We do not need to worry about the second condition. The recipient can be a U.S. citizen and receive the assets free of the Section 2801 tax because the first element–a covered expatriate is giving away money or leaving a bequest–is not satisfied.

  • If she continues to be a dual citizen and inherits money from her parents, there can be no Section 2801 tax imposed because her parents are not covered expatriates.
  • If she terminates her U.S. citizenship and then her parents leave her an inheritance, the Section 2801 tax cannot be imposed for two reasons: her parents are not covered expatriates, and she (the recipient) is not a U.S. citizen or resident.
Expatriation