New Tax on U.S. Citizens Who Relinquish Their Citizenship or Green Card Holders Who Terminate Their U.S. Residency

Pursuant to the Heroes Earnings Assistance and Relief Tax Act of 2008, which was signed into law a few weeks ago, certain U.S. citizens who relinquish their U.S. citizenship and green-card holders who terminate their U.S. residency will be liable for payment of U.S. income taxes on all of their net unrealized gain in the value of their property as if such property had been sold for its fair market value on the day before the relinquishment of citizenship or termination of residency. In other words, they would be deemed to have sold their property on the day of relinquishing their citizenship/residency and will owe tax on any resulting, albeit fictional, net gains. The Heroes Earnings Assistance and Relief Tax Act (a/k/a "the HEART Act") is likely to affect mostly high-net-worth individuals. The net deemed gain on which tax is due will be recognized to the extent it exceeds USD 600,000 (and such amount will be increased by an inflation adjustment for tax years after 2008). The tax will apply to practically all property interests held by the individual on the date of relinquishment, with some very limited exceptions. In addition, the HEART Act imposes estate or gift tax on bequests and gifts made by certain former U.S. citizens in favor of U.S. persons.