Federal Government Revenue Proposal: Estate Planning Under Attack With Promises of More Taxes

Authored by Mark Lobb

As we entered 2023, many states cut taxes on individuals and companies with lofty goals of spurring investments, stabilizing growth, and assisting families during an inflationary period. The vice president of taxation and public finance for the Indiana Chamber of Commerce declared the tax cut in Indiana could provide a boost to the profitability in businesses and encourage entrepreneurship and economic growth in the state. Arizona, Idaho, Indiana, Iowa, Kentucky, Mississippi, Missouri, Nebraska, New Hampshire, New York, and North Carolina reduced individual income taxes for 2023. Arkansas, Iowa, Nebraska, New Hampshire, and Pennsylvania lowered corporate income taxes. Many other states lowered taxes through other means such as taxes on fuel, sales taxes generally, or provided or extended certain tax credits. However, the federal government does not appear to celebrate a low tax environment.

Overview: 2023-2024 Biden Administration Revenue Proposals

On March 9, 2023, the Biden administration released the 2024 Green Book which provides certain revenue proposals which affect 2023 and 2024. The revenue proposals call for an increase of trillions in federal spending along with proposed revenue raisers to cover the spending. With Congress controlled by the Republicans many commentators have referred to the Green Book as a political tool leading up to the 2024 election cycle. Clearly, the proposals as currently drafted will not be passed into law, but many of the proposals may survive negotiations in some form to pass a final budget or be resurrected in future legislation. Ignoring the Green Book is a mistake.

Of the 219 pages comprising the Green Book, approximately 140 pages—or 64% of the text—focuses on raising taxes on companies and individuals. From increased tax rates to deduction decreases or eliminations to structural changes in the law to increase taxes or estate taxes, the Green Book has something for everyone.

The Green Book opens with a proposed increase in the tax rate imposed on Subchapter C corporations from 21% to 28%. The increase would be effective January 1, 2023. This rate increase proposal is followed by several other changes to increase taxes on businesses. Will the Republicans in the House agree to a compromised tax rate?

The Green Book then shifts attention to individuals. One proposal which has gained much attention is the “billionaire minimum tax.” This tax imposes a minimum tax rate on income, gains and unrealized gains of individuals who have more than $100 million. The proposal includes a provision phasing in the tax for those over $100 million but under $200 million by having the tax imposed on unrealized gain available as a credit when the asset is sold and allowing for installment payments. This year’s proposal calls for a 25% tax rate which is up from the 20% tax rate proposal in last year’s Green Book.

The most significant proposals include:

Raising the corporate rate to 28%
Increasing the top individual tax rate on ordinary income to 39.6%
Taxing capital gains as ordinary income for high-income taxpayers
Repealing like-kind exchanges
Imposing a 25% minimum tax targeting unrealized gains for individual taxpayers with $100 million in net assets
Expanding the 3.8% tax on net investment income
Taxing carried interest in certain partnerships as ordinary income
Repealing the step-up in basis of inherited assets and requiring tax at death
Changing grantor trust rules
Imposing new restrictions for large individual retirement accounts of high-income taxpayers

Estate and Gift Taxation Proposals

The Green Book continues the Biden administration’s push to tax estates. The proposals are reflective of past proposals with some refinements. The key proposals are as follows:

Annual gifting would be limited to $50,000 per donor, indexed for inflation after 2024. A donor’s transfers in a single year in excess of $50,000 would be taxable, even if the total gifts to each individual done did not exceed the annual gift exclusion amount which is $17,000 for 2023.
Inheritances and lifetime gifts and exceeding holding periods for assets in trust will be recognition events for income tax purposes in addition to the potential gift, estate, and generation-skipping transfer (GST) taxes imposed. There will be an exclusion on gain of $5 million, and it remains portable to a surviving spouse.
The tax benefits of GRATs would be substantially limited. The proposal would require: (1) a GRAT to have a term of at least 10 years, (2) that a GRAT last no longer than the life expectancy of the grantor plus 10 years, (3) that the remainder interest (the amount of the taxable gift) be the greater of (a) 25% of the value of the assets contributed or (b) $500,000, and (4) transactions between the GRAT and the taxpayer would be recognition events for income tax purposes.
Income tax payments required to be made by the grantor under the grantor trust rules would be treated as gifts to the trust. The value of the gift will be determined as of December 31 of each year. The gift will be the sum of all income taxes paid less any reimbursements made to the grantor by the trust. The proposal explicitly excludes revocable trusts from this regime and effectively ignores typical irrevocable life insurance trusts that hold only non-income-producing life insurance policies.
If a promissory note was originally treated as having a sufficient interest rate to avoid having any foregone interest as income or any part of the transaction treated as a gift, then for future valuation purposes, the interest rate for the loan will be the greater of: (1) the stated interest rate in the promissory note, or (2) the applicable IRS published rate at the date of valuation. For purposes of valuation, the loan must be assumed to be short term to avoid the application of discounts. If passed, this proposal would take immediate effect applying to any valuation after the enactment date regardless of when the promissory note was issued.
The generation-skipping transfer (GST) tax-exempt status would apply only to “beneficiaries no more than two generations below the transferor, and to younger generation beneficiaries who were alive at the creation of the trust…” This means the tax-exempt status would only apply to transfers to the taxpayer’s children, grandchildren and those great-grandchildren (or younger) who were alive when the trust was created. This change would apply to both pre-enactment and post-enactment trusts. Trusts existing at the time of enactment of this proposal will be treated as having been created on the enactment date in identifying what beneficiaries are alive.
All trusts with an estimated value over $300,000 at the end of a taxable year or $10,000 of income would be required to report information about its grantor, trustees, and “general information with regard to the nature and estimated total value of the trust’s assets as the Secretary might prescribe” to the IRS. This proposal would apply for taxable years ending after the date of enactment.
The definition of “executor” would be expanded. Just as with the previous Obama proposal, the 2023 Green Book proposes that the definition of “executor” apply for all tax matters and would grant the Treasury Department regulatory authority to establish a priority order when multiple parties meet the definition.

The Meaning of the 2023 Green Book

The proposals may not be enacted into law, but they are not going away. Some elements of these proposals may survive in the form of legislation before 2024, but what dies today will likely end up in further proposed legislation down the road. Parts of Build Back Better are in these proposals and are clearly legislative priorities for many people in D.C. The tax and estate planning rules we live by today will not be the same in future years. Our recommendation is to plan for the worst today and avoid trying to predict what the rules will be tomorrow. The Green Book provisions are forward looking, so they use all available tools to eliminate or mitigate estate tax today. Tax deferrals are great, but if you think effective tax rates will be higher in the future, deferring tax may not be a great idea. The key is to plan now and employ the favorable laws to your advantage before changes are enacted. Maximize the use of annual gifting, utilize favorable tax rates for Subchapter C corporations, and maximize the many benefits of grantor trusts to eliminate or limit estate tax.

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Authored by Mark Lobb

Overview: 2023-2024 Biden Administration Revenue Proposals

The most significant proposals include:

Raising the corporate rate to 28%
Increasing the top individual tax rate on ordinary income to 39.6%
Taxing capital gains as ordinary income for high-income taxpayers
Repealing like-kind exchanges
Imposing a 25% minimum tax targeting unrealized gains for individual taxpayers with $100 million in net assets
Expanding the 3.8% tax on net investment income
Taxing carried interest in certain partnerships as ordinary income
Repealing the step-up in basis of inherited assets and requiring tax at death
Changing grantor trust rules
Imposing new restrictions for large individual retirement accounts of high-income taxpayers

Estate and Gift Taxation Proposals

The Green Book continues the Biden administration’s push to tax estates. The proposals are reflective of past proposals with some refinements. The key proposals are as follows:

Annual gifting would be limited to $50,000 per donor, indexed for inflation after 2024. A donor’s transfers in a single year in excess of $50,000 would be taxable, even if the total gifts to each individual done did not exceed the annual gift exclusion amount which is $17,000 for 2023.
Inheritances and lifetime gifts and exceeding holding periods for assets in trust will be recognition events for income tax purposes in addition to the potential gift, estate, and generation-skipping transfer (GST) taxes imposed. There will be an exclusion on gain of $5 million, and it remains portable to a surviving spouse.
The tax benefits of GRATs would be substantially limited. The proposal would require: (1) a GRAT to have a term of at least 10 years, (2) that a GRAT last no longer than the life expectancy of the grantor plus 10 years, (3) that the remainder interest (the amount of the taxable gift) be the greater of (a) 25% of the value of the assets contributed or (b) $500,000, and (4) transactions between the GRAT and the taxpayer would be recognition events for income tax purposes.
Income tax payments required to be made by the grantor under the grantor trust rules would be treated as gifts to the trust. The value of the gift will be determined as of December 31 of each year. The gift will be the sum of all income taxes paid less any reimbursements made to the grantor by the trust. The proposal explicitly excludes revocable trusts from this regime and effectively ignores typical irrevocable life insurance trusts that hold only non-income-producing life insurance policies.
If a promissory note was originally treated as having a sufficient interest rate to avoid having any foregone interest as income or any part of the transaction treated as a gift, then for future valuation purposes, the interest rate for the loan will be the greater of: (1) the stated interest rate in the promissory note, or (2) the applicable IRS published rate at the date of valuation. For purposes of valuation, the loan must be assumed to be short term to avoid the application of discounts. If passed, this proposal would take immediate effect applying to any valuation after the enactment date regardless of when the promissory note was issued.
The generation-skipping transfer (GST) tax-exempt status would apply only to “beneficiaries no more than two generations below the transferor, and to younger generation beneficiaries who were alive at the creation of the trust…” This means the tax-exempt status would only apply to transfers to the taxpayer’s children, grandchildren and those great-grandchildren (or younger) who were alive when the trust was created. This change would apply to both pre-enactment and post-enactment trusts. Trusts existing at the time of enactment of this proposal will be treated as having been created on the enactment date in identifying what beneficiaries are alive.
All trusts with an estimated value over $300,000 at the end of a taxable year or $10,000 of income would be required to report information about its grantor, trustees, and “general information with regard to the nature and estimated total value of the trust’s assets as the Secretary might prescribe” to the IRS. This proposal would apply for taxable years ending after the date of enactment.
The definition of “executor” would be expanded. Just as with the previous Obama proposal, the 2023 Green Book proposes that the definition of “executor” apply for all tax matters and would grant the Treasury Department regulatory authority to establish a priority order when multiple parties meet the definition.