On March 9, 2023, President Biden published his 2024 budget proposals. Subsequently, the Treasury has published their new “Green Book, “General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals,” that not only tries to explain the administration’s proposed tax changes in the proposed budget (including new estate planning-related changes) but adds several proposals contained in the 2023 Green Book, albeit with some modifications. Here is a quick outline of the proposals in the 2024 Green Book:
Increase the top marginal income tax rate to 39.6% for:
- Individual taxpayers with taxable income over $450,000;
- Married individuals filing a joint return with taxable income over $400,000;
- Unmarried individuals (other than surviving spouses) with taxable income over $425,000 filing as head of household; and,
- Married individuals filing a separate return with taxable income over $225,000.
Make lifetime gifts and testamentary transfers “recognition events” (i.e. capital gains tax is due for appreciated assets) with some exemptions and deferrals;
- For taxpayers with more than $1 million of taxable income, increase the tax on long-term capital gains and qualified corporate dividends at 37% (40.8% including net investment income tax).
- For taxpayers whose net worth exceeds $100 million, a 25% minimum tax on total income, including unrealized capital gains;
- Eliminate the present interest requirement and impose an overall $50,000 per donor per year limitation on current gifts;
- Make an allocation of Generation Skipping Transfer exemption apply only through the generation of the transferor’s grandchildren and prevent avoidance of a taxable termination by having a charity as a continuing trust beneficiary;
- Require that Grantor Retained Annuity Trusts (GRATs) have a minimum remainder value of more than 25% of the assets contributed; eliminate decreasing annuities from year to year and require a minimum 10-year term;
- Treat as a taxable gift the grantor’s payment of the income tax on the income of a Grantor Trust (other than one that is revocable);
- Eliminate the use of partial interest discounts for transfers to family members;
- Require consistent valuation of promissory notes when transferred and when received;
- Require that every trust worth more than $300,000 (indexed for inflation) at the end of the year or whose gross income exceeds $10,000 (also indexed for inflation), to report annually its net worth;
- Require any Generation-Skipping Trust to report on its annual income tax return its inclusion ratio at the time of any trust distribution to a non-skip person, and information regarding any trust modification or transaction with another trust that occurred during that year;
- Ignore defined value formula gift or bequest clauses that depend upon the value determined by the IRS or finally determined for federal tax purposes, with an exception where the formula would be effective if the unknown value is determinable by something identifiable other than activity of the IRS, such as an appraisal; or if the clause is used to define a marital or exemption equivalent bequest at death based on the decedent’s remaining applicable exclusion amount;
- Provide that trust loans to beneficiaries would carry out Distributable Net Income;
- Permit Charitable Lead Annuity Trusts only if they have level annual charitable payments and the remainder is worth at least 10% of the initial value of the trust funds;
- Move the existing definition of executor from Code Sec. 2203 to Code Sec. 7701 to make it apply for all tax purposes, and authorize such an executor to do anything on behalf of the decedent in connection with the decedent’s pre-death tax liabilities or other tax obligations that the decedent could have done if still living;
- Increase the Code Sec. 2032A cap on the maximum valuation decrease for “qualified real property” elected to be treated as special use property to $13 million; and
- Extend the duration of the automatic lien on unpaid estate taxes beyond the current 10-year period to continue during any deferral or installment period for unpaid estate and gift taxes.
Although commentators have given the changes proposed by the Administration no chance of getting through a divided congress, proponents see this as being a welcome change of direction in the tax debate. From an estate planning point of view, not only will there be a greater tax burden, there will also be substantially increased compliance burden on trusts and trustees, on top of the pending reporting burdens imposed after January 1, 2024 by the Corporate Transparency Act. I would also anticipate, if the net worth of people with assets over $100 million will be taxed at 25% annually, we will see more use of such techniques as the Purpose Trust scheme used in the Patagonia matter, with all of the possible issues that such a trust entails.