On March 28, the Biden administration released its budget recommendations for fiscal year 2023 (which begins this October 1). The budget calls for nearly $5.8 trillion in spending during the upcoming fiscal year, offset by $4.6 trillion in revenues. The revenue proposals are described in the Treasury Department's General Explanation of the Administration's Fiscal Year 2023 Revenue Proposals (commonly referred to as the Treasury "Green Book"), which accompanied the budget recommendations.
A number of these items affect estate and gift tax-related issues. Here are a few key items to note regarding these proposals.
#1. The Green Book incorporates the Build Back Better Act that was passed by the House of Representatives in 2021 in the baseline.
Typically, the spending and revenue proposals reflect an administration's fiscal priorities for the upcoming fiscal year. But that is not necessarily the case this year. In light of the ongoing discussions surrounding last year's House-passed "Build Back Better" legislation, the Green Book states that the administration's proposed revenue proposals utilize a "baseline that incorporates all revenue provisions of Title XIII of H.R. 5376 (as passed by the House of Representatives on November 19, 2021) [other than the SALT proposal]." In other words, this budget package assumes the enactment of the revenue provisions in the "Build Back Better Act"; the revenue proposals in the Green Book are additional revenue proposals. Many of these proposals were described in last year's Green Book (for fiscal year 2022) and were considered but not included in the House-passed Build Back Better Act.
#2. The Green Book would alter the taxation of capital gains.
The proposals would treat death or the gift of appreciated property as a realization event, resulting in capital gains tax being incurred immediately upon such an event. Each individual would receive a $5 million lifetime exclusion. Additionally, the Green Book would tax capital gains for high-income earners (over $1 million) at ordinary income rates and would impose a minimum 20% tax on total income (including unrealized capital gains) for taxpayers with wealth over $100 million.
#3. The Green Book would limit the duration of GST exemption.
Under current law, allocating sufficient generation-skipping transfer (GST) tax exemption to a trust makes the trust perpetually GST-exempt. These proposals would limit the duration of GST exemption for trusts based on the generation of the beneficiaries of the trust, generally allowing GST-exempt distributions only to beneficiaries who are no more than two generations below the transferor and those beneficiaries who were alive at the creation of the trust. Pre-enactment trusts would not be grandfathered in under this new regime, but rather would be treated as though they were created on the date of enactment.
#4. The Green Book would alter the tax treatment of grantor trusts.
Under current law, the creator of a grantor trust is treated as the owner of the trust assets for income tax purposes, which means that the grantor can engage in transactions with his or her grantor trust without triggering a realization event and can pay the income taxes of a grantor trust without making a taxable gift. The Green Book proposals would dramatically change the treatment of grantor trusts (other than revocable grantor trusts) by treating transfers to and from such trusts that occur on or after the date of enactment as recognition events. Furthermore, the Green Book would treat the payment of income taxes on behalf of a grantor trust as a gift (for trusts created on or after the date of enactment).
#5. The Green Book targets grantor retained annuity trusts (GRATs).
GRATs allow the excess of the actual rate of return on gifted assets over the expected rate of return set out in the so-called Section 7520 rate published monthly by the Treasury to pass to beneficiaries with little or no taxable gift. The Green Book proposals would cripple the efficiency of GRATs by requiring the remainder interest (i.e., the taxable gift portion) in a GRAT to have a minimum value of the greater of 25% of the value of the assets contributed to the GRAT or $500,000; requiring GRATs to have a minimum term of 10 years; and prohibiting tax-free asset swaps with GRATs.
#6. The Green Book would require increased use of electronic filing of certain tax returns.
Specifically, the Green Book would require electronic filing of estate tax returns (Form 706) , gift tax returns (Form 709), and trust income tax returns (Form 1041) for all related individuals, estates, and trusts with assets or gross income of $400,000 or more in any of the three preceding years.
Although it is unclear at this point which, if any, of these proposals will be enacted, we continue to recommend that clients engage in planning to make use of their expanded estate, gift, and GST tax exemptions before it is too late. Please contact us if you would like to discuss the Green Book proposals, gifting strategies, or your estate plan in general.