The US Exit Tax and Offshore Trusts

The U.S. exit tax is a capital gains tax on Americans who renounce citizenship and on long-term green card holders who give up permanent residence. Federal law treats a covered expatriate’s worldwide assets as sold at fair market value on the day before expatriation. For people expatriating in 2026, net gain above $910,000 is taxed; gain below that amount is excluded.

The exit tax reaches offshore trust assets. A Cook Islands trust is a grantor trust while its settlor is a U.S. person, so the settlor is treated as owning the trust assets for both the $2 million net worth test and the deemed sale. Funding an offshore trust protects assets from creditors; it does not shrink the exit tax.

Who Has to Pay the Exit Tax?

The exit tax applies only to covered expatriates. Two groups can become covered: U.S. citizens who renounce citizenship, and green card holders who held permanent residence in at least 8 of the 15 tax years before giving it up. A person in either group becomes a covered expatriate by meeting any one of three tests:

• Net worth test. Worldwide assets of $2 million or more on the expatriation date, counting home equity, retirement accounts, business interests, and beneficial interests in trusts. The $2 million line is not adjusted for inflation.
• Tax liability test. Average annual net federal income tax above $211,000 for the five years before expatriation. The figure is indexed each year; $211,000 is the 2026 amount.
• Certification test. Failing to certify five years of full U.S. tax compliance on Form 8854. A person with modest assets and income is still a covered expatriate if past foreign trust or foreign account reporting is incomplete.

A narrow exception protects dual citizens from birth who remain citizens and tax residents of the other country and who spent no more than 10 of the prior 15 years living in the United States. Minors who expatriate before age 18½ have a similar exception. Everyone else who meets a test is covered, whether or not the expatriation has anything to do with taxes.

How Is the Exit Tax Calculated?

The exit tax is calculated as if the expatriate sold every asset at fair market value on the day before the expatriation date. Net gain above the exclusion amount, $910,000 for 2026, goes on the final dual-status return and is taxed under the normal capital gains rules. The rule, found in IRC Section 877A, is a mark-to-market tax: no sale happens, but tax is due as if one had.

Each asset’s basis then adjusts to its marked value, so gain taxed at expatriation is not taxed a second time when the asset actually sells. Three categories of assets follow different rules:

• Deferred compensation. Eligible plans, including most employer 401(k)s, are not marked to market; the payer instead withholds 30% of each later distribution. Ineligible arrangements are treated as paid out in full the day before expatriation.
• IRAs. Treated as fully distributed on the day before expatriation and taxed as ordinary income, with no early-withdrawal penalty. The $910,000 exclusion does not apply to these deemed distributions.
• Interests in non-grantor trusts. Not marked to market. Later distributions are instead subject to 30% withholding, described below.

Does an Offshore Trust Reduce the Exit Tax?

No—an offshore asset protection trust does not reduce the exit tax, and funding one does not move the settlor under the $2 million net worth test.

The net worth test counts beneficial interests in trusts. IRS guidance values a trust interest through a two-step process that assigns the settlor the value of what the settlor could receive, and Form 8854 requires a statement describing each trust interest. A settlor who funds a self-settled offshore trust remains one of its beneficiaries, so the trust’s value stays inside the settlor’s net worth.

The deemed sale reaches the same assets a second way. While the settlor is a U.S. person, the trust is a grantor trust, meaning the settlor is treated as owning the trust property for income tax purposes. Assets held through a grantor trust are marked to market at expatriation exactly as if the settlor held them in a personal account.

The question we hear most often from people weighing renunciation is whether funding the trust first will bring net worth under the $2 million line. The answer is no: the settlor keeps a beneficial interest in a self-settled trust, and Form 8854 counts that interest at its value.

Completed gifts made outright before expatriation do reduce net worth: an outright gift to a spouse, a child, or an irrevocable trust that excludes the settlor permanently removes those assets. The settlor also gives up all access, which is what makes the gift complete.

What Happens to a Cook Islands Trust When the Settlor Expatriates?

A Cook Islands trust survives its settlor’s expatriation, and its creditor protection does not change—Cook Islands law never depended on the settlor’s citizenship. The tax treatment changes twice.

First, the trust’s assets pass through the deemed sale with everything else the settlor owns, and their basis adjusts to fair market value. A trust portfolio marked to market at expatriation carries little built-in U.S. gain into the years that follow.

Second, the trust usually stops being a grantor trust. The rule that makes an offshore trust a grantor trust, IRC Section 679, applies only to U.S. persons. Once the settlor is no longer a U.S. person, grantor status survives only if the trust is revocable or if the settlor and spouse are the only people who can receive distributions during the settlor’s life. A discretionary trust naming children or other family as current beneficiaries fails both conditions and becomes a foreign non-grantor trust.

As a foreign non-grantor trust, the trust pays U.S. tax only on U.S.-source income. Distributions to beneficiaries who remain U.S. persons carry their own reporting obligations. Accumulated income distributed years later can be taxed at unfavorable rates under the throwback rules. A settlor whose children will stay in the United States should price that consequence before setting an expatriation date, not after.

In our experience, people treat the consulate appointment as paperwork and the tax as something to sort out afterward. The order should run the other way. The deemed sale is measured on the day before the expatriation date, which makes the date the one variable fully within the settlor’s control. The expatriates who come out ahead are the ones whose CPA priced the deemed sale on current asset values before anyone booked the appointment.

For an American who moves abroad and keeps U.S. citizenship, none of this is triggered—an offshore trust for expats adds creditor protection while the existing compliance routine continues unchanged.

The 30% Withholding on Non-Grantor Trust Distributions

Covered expatriates who hold an interest in a non-grantor trust face 30% withholding on the taxable portion of every later distribution, with no time limit. The rule covers trusts that were non-grantor trusts on the day before expatriation—typically a trust someone else created, such as a parent’s irrevocable trust naming the expatriate as a beneficiary. A self-settled offshore trust is normally a grantor trust at that moment, so it runs through the deemed sale instead.

The expatriate must send Form W-8CE to the trustee within 30 days of expatriating, and treaty rates cannot reduce the withholding. The one exit is electing immediate tax on the trust interest’s value at expatriation, and the IRS confirms that value only through a private letter ruling.

The 40% Tax on Gifts and Inheritances from Covered Expatriates

A covered expatriate’s later gifts and bequests to U.S. citizens or residents are taxed at 40%, and the recipient pays it, not the expatriate. The tax, IRC Section 2801, closes an obvious loop: expatriate, let assets appreciate abroad free of U.S. tax, then pass them back to U.S. children. Final IRS regulations apply to gifts and inheritances received on or after January 1, 2025, and recipients report the tax on Form 708. Covered status is permanent for this purpose; a gift made decades after expatriation is still a covered gift.

Gifts a covered expatriate makes to a foreign trust, including an existing Cook Islands trust, carry the tax with them. The regulations tax U.S. beneficiaries proportionally: the covered share of the trust determines the taxable share of each distribution. A foreign trust can instead elect to be treated as domestic and pay the tax when the gift arrives, which relieves the beneficiaries of the burden.

Gifts completed before the expatriation date are not covered gifts. With a $15 million lifetime gift and estate tax exemption in 2026, most people can move what their U.S. family will need before expatriating rather than leave a 40% tax hanging over every future transfer.

Does Renouncing Citizenship Protect Assets from Lawsuits?

Renouncing U.S. citizenship does not protect assets from lawsuits. A judgment is enforced against property, not against a passport, and a former citizen’s New York brokerage account is exactly as reachable as a citizen’s.

Moving assets abroad personally does not help much either. Most countries where Americans relocate, including Canada, the United Kingdom, and most of Europe, enforce U.S. money judgments through their own courts. The jurisdictions that refuse are the few with asset protection statutes, and using them requires no change in citizenship. An offshore trust places assets with a trustee in a jurisdiction that does not recognize U.S. judgments, and it works the same whether the settlor lives in Dallas or Lisbon.

We hear from Americans planning a move abroad who assume renunciation will end their exposure to U.S. lawsuits. What we see is closer to the reverse. Renouncing costs a covered expatriate the exit tax and adds no creditor protection. A trust blocks enforcement at a fraction of the deemed-sale tax on a large estate, whether or not the person ever leaves.

Planning Before the Expatriation Date

Exit tax planning works only before the expatriation date, because every test and the deemed sale are measured on that day. The order of steps decides the outcome.

Getting under the $2 million net worth line requires completed gifts to people, or to trusts that exclude the settlor. Gifts to a citizen spouse are unlimited. A non-citizen spouse can receive only $194,000 each year under the 2026 annual exclusion, so an early start counts more when the marriage is cross-border. Gifts into the settlor’s own offshore trust accomplish nothing for the net worth test, for the reasons covered above.

The certification test catches more offshore trust settlors than the wealth tests do. Certifying five years of full compliance means five clean years of the offshore trust reporting forms (Forms 3520 and 3520-A, FBAR, and Form 8938), not just five filed income tax returns. A settlor considering expatriation should have the CPA confirm the foreign trust filings are complete before anything else, because curing past gaps takes time.

Tax filings for expatriation are the CPA’s work: Form 8854, the final dual-status return, Form W-8CE, and the foreign trust forms all belong to the accountant. The attorney’s work is the trust structure and the gift sequence.

For most people, the offshore trust delivers the protection that started the expatriation conversation, without the deemed sale, the 40% tax on family gifts, or the loss of citizenship. The exit tax is worth planning around only when the move abroad is happening for its own reasons.