Need to Know: 2025 Tax Updates Affecting Foreign Trusts and Cross-Border Estates

As the U.S. increases transparency and oversight around foreign trusts, expatriation, and cross-border wealth transfers, individuals and families with offshore structures face a more complex tax environment.

Expanded Foreign Trust Requirements

The One Big Beautiful Bill Act (OBBBA) enacted on July 4, 2025, expands reporting and due-diligence requirements for foreign trusts and pass-through structures. Trusts that have U.S. beneficiaries, U.S. grantors, U.S. trustees, or that allow U.S. persons to exercise certain powers may now trigger new disclosure requirements and potential U.S. tax exposure. As a result, distinguishing between foreign grantor and foreign non-grantor trust treatment has become more important, particularly where trust distributions, retained powers, or governance structures create U.S. tax connections.

Gifts and Bequests from Covered Expatriates

In addition, on January 14, 2025, the IRS issued final regulations under IRC §2801, imposing a tax on U.S. persons who receive gifts or bequests from individuals classified as “covered expatriates.” This tax is imposed on the recipient—not the donor—and is calculated at the highest federal estate tax rate in effect at the time of the transfer (currently about 40%). The definition of a covered expatriate aligns with the expatriation rules under §877A. The regulations also create a rebuttable presumption: if a U.S. recipient receives a gift or inheritance from a foreign person, it is presumed to be from a covered expatriate unless the donor authorizes the release of relevant tax information. Importantly, this rule applies regardless of where the asset is located, and regardless of when the expatriation occurred, if the transfer is received on or after January 1, 2025. Foreign trusts that make distributions to U.S. beneficiaries therefore must determine whether any part of the trust is funded or attributable to a covered expatriate, and whether the trust or beneficiaries may be liable for §2801 tax.

No Estate and Gift Tax Exemption Increase for NRAs

Beginning January 1, 2026, OBBBA also raises the federal estate, gift, and generation-skipping transfer (GST) tax exemption to $15 million per individual or $30 million per married couple, indexed for inflation, effectively making the higher exemption permanent. However, this change does not extend to nonresident aliens (NRAs) with U.S.-situs assets. For NRAs, the U.S. estate tax exemption remains approximately $60,000, leaving significant exposure for U.S. real estate, shares of U.S. corporations, and other U.S.-sourced property. In contrast, U.S. citizens and residents with foreign trust interests may benefit from higher exemption planning opportunities—but only where assets are situated within the U.S. tax system or included in a U.S. taxable estate.

The current environment requires careful evaluation of trust classification, beneficiary status, expatriation history, and situs of assets. Families with cross-border wealth should not assume prior planning remains sufficient. Coordinated legal, tax, and fiduciary review is increasingly necessary to avoid unintended tax liabilities and to preserve long-term estate planning goals.