On May 28, 2021, the Biden Administration released its "Green Book," which summarizes the Administration's tax proposals. While the Green Book is not proposed legislation, it highlights the Administration's focus on taxing high net worth individuals.
Contrary to expectations, the Green Book does not propose a reduction in the federal gift and estate tax exemptions, nor does it increase federal gift and estate tax rates. Instead, the estate related Green Book proposals, highlighted below, would change the foundational underpinnings of many estate planning strategies by significantly reworking capital gain taxation rules. Though it is uncertain whether the proposals in the Green Book will be enacted, the proposed effective date for many of the proposals is January 1, 2022, resulting in a planning opportunity now for taxpayers who would be affected by the potential changes.
The following are several proposed changes outlined in the Green Book:
- Treat Gifts and Bequests of Appreciated Property as
Realization Events for Capital Gain: Under current law,
lifetime gifts and transfers of assets at death do not trigger
gain. A donee of a gift receives a "carryover" income tax
basis in the asset (deferring gain recognition until a later
taxable transfer), while appreciated inherited assets receive a
"stepped-up" basis to fair market value as of the
decedent's death (eliminating capital gains tax on any
appreciation).
Under the proposed legislation, gifts and bequests of appreciated assets will trigger an immediate recognition of taxable gain at the time of the transfer.
- Realization on In-Kind Transfers to or from Trusts and
Certain Other Entities: In-kind transfers of property to
or from trusts and certain transfers to and from other pass-through
entities would trigger recognition of gain. Gain on revocable
trust assets would also be recognized if the trust becomes
irrevocable or at the donor's death.
- Capital Gain Recognition of Dynasty Trusts: A
dynasty trust would recognize gain on unrealized appreciation if
that property has not been subject to a recognition event within
the prior 90 years. The 90-year period would begin on Jan. 1,
1940, making Dec. 31, 2030, the first possible date of a
recognition event for a trust.
- No Valuation Discounts When Determining Gain: A gift or bequest of a partial interest would be valued at its proportional share of the fair market value of the entire property, i.e., no valuation discounts for transfers of partial interests.
In light of these proposals, it is advisable to review your estate planning before the end of the year. Consider some of the following planning opportunities that could mitigate the impact of these changes:
- Taxpayers should maximize the use of available exemptions,
especially the generation-skipping transfer tax exemption for gifts
into dynasty trusts.
- Planning with irrevocable grantor trusts should be completed in
2021 to take advantage of any possible benefits that may be
provided for trusts created before the effective date of new
legislation.
- Individuals who own closely held business interests or real
estate investments should consider transferring their interests
before the end of the year while valuation discounts are still
available.
- Gifting cash or assets with a high tax basis is recommended to minimize the exposure to recognition of capital gains.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.