Is renouncing U.S. citizenship a good method of avoiding the federal estate tax?

The following excerpts are from Martin A. Vaughan, New Law Makes Escape Tougher For Tax Exiles, Wall St. J., May 28, 2008, at D1:

It’s been called “the ultimate estate plan”: moving to a desert island or other far-off locale to escape the clutches of the Internal Revenue Service.

Indeed, hundreds of Americans do formally renounce their U.S. citizenship every year, many in order to protect their wealth from income, estate and gift taxes. But last week, Congress may have made life less rewarding for tax exiles. * * *

In 2007, 470 Americans renounced their citizenship to move abroad, according to a Wall Street Journal review of Federal Register notices. * * *

Congress has passed a law that will tax the assets of those who leave for good on their way out the door, as if they were selling those assets. But tax experts say the more significant change may be a provision that taxes U.S. heirs on amounts given or left to them by ex-U.S. citizens. Taxing the recipient instead of the donor will make it harder to get around the tax rules.

“The new rules say, if you leave any of your property to a U.S. person, it will be taxed at the rates for U.S. gift tax,” which are currently 45%, says Henry Alden, a certified public accountant at Everest International Group, a Baltimore-based financial-planning firm. * * *

U.S. citizens and long-term residents who are terminating their status will be taxed once on their unrealized gains, at current market rates. Stock portfolios, real estate, art and most other types of assets will be captured by this new “mark to market” tax. Some experts say the new law could deter some citizens or residents from leaving the U.S., since the benefits of doing so will be reduced. Yet the simplicity of the new one-time tax may appeal to others. * * *

Special thanks to Joel Dobris (Professor of Law, UC Davis School of Law) for bringing this article to my attention.