Technical article
A Grandchild Who Gives Up US Citizenship: What the Trust Has to Hold Back
A trustee who does not know a grandson has given up citizenship cannot hold back the right amount.
Picture a grandson who holds a US passport and lives in Portugal. He decides to give up his US citizenship. Years earlier, his grandmother set up a US trust for the family that pays out income to him. This is an example family, not a forecast. What changes for the trust?
The tests that decide
The United States taxes a person who gives up citizenship as if all of that person's property had been sold the day before. The rule applies to a covered expatriate, a person who meets any one of three tests.
| Test | Figure |
|---|---|
| Net worth | US$2 million or more |
| Average yearly income tax | Above US$206,000 (2025 figure) |
| Certification | The person did not certify on Form 8854 that US tax rules were met |
A base amount of the deemed gain is excluded. It started at US$600,000 and is adjusted for inflation. The 2025 figure was US$890,000. The figures here are from 2025.
A person who meets none of the tests is outside this tax. The test uses the grandson's own net worth and tax history, not the trust's.
What the trust does
The sources describe a special rule for trusts. For a former citizen who meets a test and is a beneficiary of a non-grantor trust, the trustee holds back 30% of the taxable part of each distribution. The trust also recognizes gain, as if it sold appreciated property to the former citizen at market value.
A non-grantor trust is one that pays its own tax and is not treated as owned by the person who set it up.
Why it reaches the trust
The exit tax is the heir's own bill, charged on the heir's own property. The trust enters through the payouts, because the law makes the trustee the one who holds the money back. The heir files Form 8854 when citizenship is given up. That form is also where the certification test is met or missed.
The tax on skipping a generation is a different charge. It turns on generation and not on residence, so a grandchild's move abroad does not alter whether that tax applies.
What happens on the way in
If someone in the United States later receives a gift or inheritance from a former citizen who meets a test, section 2801 puts a tax on the receiver. The rate is the top estate tax rate, 40%, on amounts above the yearly gift exclusion of US$19,000. Credit is given for foreign gift or estate tax. Domestic trusts are taxed as if they were citizens. Form 708 applies to transfers received on or after January 1, 2025.
Where the trust stands
| Heir's status | What the trustee does |
|---|---|
| US citizen abroad | Reports the share on Schedule K-1; the heir taxed as a US person |
| Nonresident alien | Holds back 30% of US-source income, lower by treaty |
| Former citizen who meets a test | Holds back 30% of the taxable part of each distribution |
You could
You could ask each heir's family whether anyone is thinking about changing citizenship. You could also ask the trustee how it would learn of a change, and whether the trust document says who bears the tax that is held back. The 30% comes from the heir's payout, not from the other heirs' shares.
Has a member of your family considered changing citizenship? Tell us what you learned along the way. Someone with heirs in several countries may find it useful.
Figures are estimates for planning, based on public data. Date read: October 2026.
Sources
- IRS expatriation tax page (A)
- Cornell LII 26 USC 877A and 2801 (A)
- IRS What's New estate and gift tax (A)
- IRS Rev. Proc. 2025-32 (A)
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