The Biden administration recently released its 2024 fiscal revenue proposal, which includes several sweeping changes that will affect most aspects of estate planning. The first reaction of many was that this would not pass the Republican-controlled House of Representatives. Although this may be true, no one should say never when it comes to action by Congress. And with debt ceiling negotiations looming, the deals that might be struck are unpredictable, even deals that might include one or more of the Biden administration’s proposed changes to property taxes. It is also important to note that many aspects of the administration’s estate tax proposals have circulated in similar formats for many years. Thus, even if these changes are avoided in this round, they may not be avoided forever.
It is unlikely that many individuals will be motivated to take significant planning actions based on the Green Book. Many people scrambled to plan in 2012, 2020, and 2021 ahead of the expected harsh tax changes, none of which materialized. Thus, most clients are likely to be skeptical of communication from advisors regarding the impact of “plan now, before enacting major, aggressive tax changes.” However, it would seem prudent for CPAs to warn clients about proposals and that they should at least consider the implications. Some proposals will not be effective until after their approval date. Others will influence every trust or plan regardless of when it was made. So it seems advisable to at least complete logical planning before changing any of the laws. Here is just a brief overview of some of the many changes that have been proposed.
Who is the enforcer?
The definition of who is considered to be an ‘enforcer’ will be greatly expanded, and rules will be provided for determining who will assume that role if there is no will to name such a person. The new and expanded role of the executor will be applicable to all tax purposes, and will allow that executor to do anything on behalf of the deceased in connection with the decedent’s predeath tax obligations or other tax obligations that the decedent would have had if he were still alive. This could simplify things for CPAs trying to decide who can sign a tax return or take other actions. It can also create significant problems if that person becomes responsible for handling foreign reporting requirements, income taxes, and more.
It would seem prudent for CPAs to warn clients about proposals and that they should at least consider the implications.
Private use evaluation
Properties used on family farms, ranches or businesses would be eligible to be subject by election to be treated as private-use property, the value of which for estate tax purposes could be reduced by up to $13 million, from about $1.3 million currently. This would be a huge advantage for qualified farm, ranch, and commercial land that could change estate planning for affected taxpayers.
Under current law, complex or non-granting trusts are required to file income tax returns. Some donor funds are only reported on the grantor’s Form 1040 and no reports are filed. The Green Book will require trusts with a net worth of more than $300,000 or more than $10,000 in income to file new reports that disclose asset values and detailed information about the trustees. These disclosures, while still vague, appear to be part of a trend towards government requiring more detailed reporting and reporting for entities (for example, the Corporate Transparency Act), and now trusts. Whether or not this change is made into law, it will likely continue to be re-proposed until it is enacted. If this reporting becomes law, it is not clear if the recordings will be on the expanded Form 1041 or the new forms; If this is not the case in a 1041, then attorneys — not certified public accountants — may be more likely to deal with this compliance. If any such proposal were enacted, many individuals would chafe at more compliance demands, especially because of the potential complexity of such registrations.
Specific value mechanisms
The proposal will prohibit the use of defined value mechanisms. These techniques seek to avoid a windfall gift tax based on an audit adjustment for the value of non-marketable assets, such as interests in family businesses that are transferred to a trust. The concept behind many of these techniques is that the dollar value, not the interest rate, is transferred. If a taxpayer transferred $10 million of the LLC’s interest value—not, say, 40% of the LLC’s—if there was an audit adjustment, the percentage of membership interest that passed to the taxpayer’s trust would change, but The dollar value will remain pegged; It can be said that gifts cannot be taxed. The IRS has long hated these mechanisms, and the Biden administration has proposed removing them legislatively. This would create a great deal of disparity between taxpayers who own hard-to-value assets such as real estate, closely owned companies, or works of art, as opposed to individuals who own marketable securities. The potential impact of this change is that individuals with large holdings of assets that are difficult to value may choose to complete planning before a potential law change.
Goodbye, annual exclusion gifts?
The IRS has long hated taxpayers who make large numbers of annual gifts to trusts and use Crummey powers to qualify those gifts for annual exclusion. An individual with many children, grandchildren, nieces, and nephews—say, 30 in total—could put $17,000 x $30 into a trust and move a massive amount of wealth off their estate. This proposal would eliminate the current interest requirement (Crummey’s authority is no longer required) to qualify for the annual gift tax exemption. That’s fine for taxpayers, but it would cap all gifts at a total of $50,000 annually per donor. For most people, this would go beyond their annual gifts; But for many affluent clients, it can undermine the foundation of their annual gift plans, disrupt life insurance trust planning, and more. Although wealthy individuals can “wait and see,” it may be wise to plan now to transfer wealth into trusts if the client’s plan requires large, ongoing annual gifts.
The end of the trust dynasty?
The trend in most trust planning for many years has been to create long-term trusts limited only by a period in which state law specifies the term of the trust. Trusts are designated, to the extent available, for a Generation Over Transfer (GST) exemption so that the money in the trust can grow outside the transfer tax regime for its term. This technology will come to an end if the GST Green Book rules are enacted. One proposal essentially limits the benefit of the GST exemption to only so long as any beneficiary is at least the age of the donor’s grandchild. This could mean a large goods and services tax due in the future on the trust assets which will require liquidity planning in advance. Furthermore, with so many trusts built on this assumption, there will undoubtedly be legal and other issues to contend with; Not many expected such a drastic change in trust documents.
Will GRATs disappear?
Donor-retained pension funds (GRATs) have been a popular estate planning tool for years, but the Green Book would end the widespread use of donor pension funds. This will require that the remaining interest in the GRAT have a minimum gift tax value greater than 25% of the assets or $500,000. There can be no decrease in the annuity during the GRAT period. The grantor will recognize the gain from the exchange of assets with the trust. The minimum term for the GRAT would be 10 years and the maximum life expectancy for the retiree, plus 10 years under the proposed changes.