Editor’s Note: This is the first of three parts on the impact of the 2024 Green Book on trust and estate planning. Read Part 2. Read Part 3.
On March 9, the Biden administration released its proposed budget calling for an increase of trillions in federal spending along with his proposed offsetting revenue raisers in General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals (the 2024 Green Book.) Given the divided Congress, the chance of many or even any of these proposals becoming law now appear remote. However, it’s important for tax advisors to understand the proposals to be able to address client questions prompted by the headlines on the proposed increased taxes on high-net-worth individuals.
Here’s a summary of the key provisions affecting trust and estate planning:
‘Fair Share’ Getting Bigger
The 2024 Green Book calls for trillions of new government spending and lowering the deficit by trillions, which necessarily translates to substantially more revenue in the form of taxes. President Joe Biden states in his budget message that “[w]e more than fully pay for these investments in our future by asking the wealthy and big corporations to pay their fair share.”
The one proposal that will gain much attention again is the “billionaire minimum tax,” which is a tax imposed by virtue of wealth but isn’t itself a wealth tax. Instead, it imposes a minimum tax rate on income, gains and unrealized gains of individuals who have more than $100 million (not a billion). The proposal includes a provision phasing in the tax for those over $100 million but under $200 million, having the tax imposed on unrealized gain be available as a credit when the asset is sold and allowing for installment payments. This year’s proposal calls for a 25% tax rate, up from the 20% tax rate proposal in last year’s Green Book.
As previously proposed in the prior to Biden Green Books, gratuitous transfers would become recognition events for income tax purposes. The income tax liability would be in addition to the potential transfer taxes. Last year’s proposal, which had made some taxpayer-friendly changes from the original proposal, returns to this year’s Green Book substantively the same. There is a per donor/decedent $5 million exclusion on gain that’s portable to a surviving spouse. This will remove many taxpayers from the application of this new double taxation system, but HNW individuals will remain impacted.
The 2024 Green Book also brings new proposed taxes targeted at HNW individuals. Changes are proposed to the net investment income tax (NIIT) as well as mirroring changes for Medicare tax. Specifically, the tax rate for the NIIT be raised by 1.2% for taxpayers with more than $400,000 of income (going from 3.8% to 5%) and the Medicare tax will also be increased by 1.2% for those with earnings over $400,000. There’s a related proposal to expand what income is subject to the NIIT by closing the loophole that’s previously protected income from certain pass-through entities.
Other notable income tax hikes for HNW individuals in the 2024 Green Book that have been proposed by the Biden administration in each of its Green Books include increasing the top marginal rate for ordinary income to 39.6% for single taxpayers earning more than $400,000 and married taxpayers filing jointly with income above $450,000. There’s also a proposal to tax long-term capital gains and qualified dividends at ordinary income tax rates, which when taken together with other changes would result in a tax rate of 44.6% for taxpayers with more than $1 million of income.
The grantor trust rules have lent themselves to effective transfer tax planning by allowing transactions between the grantor and the grantor trust to be generally disregarded for income tax purposes and in depleting the grantor’s estate by obligating the grantor to cover the tax liabilities attributable to the grantor trust’s earnings. Because of their effectiveness, Democrats have proposed a variety of changes that would disincentivize their use as a transfer tax planning tool.
As proposed last year, the income tax payments required to be made by the grantor under the grantor trust rules would be treated as taxable gifts to the trust going forward. The value of the gift will be determined as of Dec. 31 of each year, where the gift will be the sum of all income taxes paid less any reimbursements made to the grantor by the trust. A technical addition to this year’s proposal is a sentence clarifying the gift can’t be reduced by the marital deduction, charitable deduction or various gift exclusions under Internal Revenue Code Sections 2503(b) and 2503(e). The proposal explicitly excludes revocable trusts from this regime. In addition, the proposal would treat transfers of an asset for consideration between a grantor and a grantor trust to be regarded for income tax purposes, thereby making sales and payments in satisfaction of an obligation recognition events triggering a capital gain (losses would be disallowed).