Taxes on gifts and bequests to Americans from expatriates

Gifts and bequests to U.S. persons from covered expatriates are taxed at the highest marginal estate or gift tax rate applicable at the time of the bequest or gift. However, the tax so imposed is reduced by the amount of any foreign estate or gift tax paid on the bequest or gift. Additionally, the gift tax annual exclusion applies, as do the rules for charitable donations and spousal transfers under the general estate and gift tax rules, and only those assets not included on a U.S. federal estate or gift tax return will be assessed the transfer tax.

Special rules apply for transfers in trust. If a gift or bequest is made from a domestic trust, the tax applies as if the trust was a U.S. citizen and the trust is required to pay the tax. Conversely, if a gift or bequest is made from a foreign trust, the tax applies to any distribution from the trust to a U.S. citizen or resident beneficiary and he or she is responsible for paying the tax. For income tax purposes, the beneficiary may deduct the amount of this tax to the extent that it was imposed on an amount also included in his or her gross income. A foreign trust may make an election to be treated as a domestic trust solely for purposes of these rules, but this election is generally irrevocable.