The Exit Tax includes both an income tax and an inheritance tax element.
The income tax element consists of a deemed “mark‐to‐market” tax on the inherent gain generally involving all of the covered expatriate’s worldwide assets. The deemed gains are classified as long‐term capital gain, short‐term capital gain, or ordinary income. The first $636,000 of gain is exempted via a proportionate allocation among the covered expatriate’s assets.
The inheritance tax element applies when one makes gratuitous transfers after choosing to expatriate from the United States. An individual may choose to make these donative transfers to children who continue to reside in the U.S. for educational, career, or martial reasons. Lifetime gift (and testamentary transfers upon death) will be taxed at the maximum gift and estate tax rates then in effect. Currently, that rate is 40%. This tax will apply even if the transfer is made to a trust domiciled in the U.S. However, if a foreign trust is used to make the gifts/donative transfers, then the U.S. citizen/resident (the beneficiary) will be required to pay the inheritance tax upon distributions from the trust.