On March 28th, the Biden Administration issued a 250-page General Explanation of the administration’s fiscal year 2023 revenue proposals. Click this link the view the “Green Book” PDF. Well-advised taxpayers are already considering actions to take before these new proposals would become effective.
Besides increasing the corporate income tax rate to 28% and long-term capital gains and qualified dividend rates for taxpayers with taxable income of more than 1 million dollars to 37%, the proposal would also cause taxation on death for capital gains assets owned by a decedent. The proposals would also impose capital gains tax on the gift of an appreciated asset to descendants to the extent exceeding the applicable thresholds described below while also disallowing valuation discounts for fractional interests unless the transfer is of an interest in an active trade or business, in which case valuation discounts would still apply to the extent assets are actively used in the conduct of such active trade or business.
Fortunately the proposals do provide a $5,000,000 (as adjusted for inflation) exclusion from the imposition of capital gains taxes on transfers during lifetime or at death, and transfers to charity or a spouse would not be subject to these rules. The proposals provide an effective date of January 1, 2023, unlike prior proposals which had retroactive effect, so there is still time to act for those considering lifetime transfers.
The proposals also take surgical cuts out of some of the most popular estate tax planning vehicles and techniques, including Grantor Retained Income Trusts (“GRATS”) which are often used to provide for appreciating assets to be removed from an affluent person’s estates. The proposed language requires that any remainder interest in a GRAT must have a minimum value, at the time such interest is created, of the greater of (1) 25% of the value of the GRAT assets or (2) $500,000 (provided that the total value of GRAT assets is greater than $500,000). Further the proposal would (a) prohibit the Grantor from acquiring via exchange an asset held in the GRAT without recognizing gain or loss, (b) would require that GRATs have a minimum term of 10 years and a maximum term of the life expectancy of the annuitant, plus ten years, and ( c) would provide that payment of income tax on assets held by the GRAT is considered a gift.
The proposals would not prevent the use of irrevocable trusts that are disregarded for income tax purposes but outside of a Grantor’s estate for estate and gift tax purposes, but would treat sales of assets between a Grantor and such a trust as being taxable if the assets sold are appreciated.