Editor’s note: This is the first of three parts on the impact of the 2024 Green Paper on trust and estate planning.
On March 9, the Biden administration released its budget proposal calling for trillions of dollars in federal spending increases, along with its proposal to balance tax revenues General explanations of the revenue proposals from the administration for the 2024 financial year (The 2024 Green Book.) With Congress divided, the chance that many or even some of these proposals will become law now seems slim. However, it is important that tax advisors understand the proposals in order to be able to answer client questions raised by the headlines surrounding proposed tax increases for high net worth individuals.
Here is a summary of the key provisions affecting trust and estate planning:
“Fair Share” is getting bigger
The 2024 Green Book calls for trillions in new government spending and a trillion deficit reduction, which inevitably translates into significantly more revenue in the form of taxes. President Joe Biden explained in its budget statement The “[w]We are more than fully paying for these investments in our future by asking the wealthy and big companies to pay their fair share.”
The only proposal that will attract much attention again is the “billionaire minimum tax,” a tax that is levied on wealth but is not itself a wealth tax. Instead, it imposes a minimum tax rate on the income, gains, and unrealized gains of individuals who have more than $100 million (not $1 billion). The proposal would phase out the tax for people over $100 million but under $200 million, with the tax on unrealized gain available as a credit upon sale of the asset and allowing for installment payments. This year’s proposal calls for a 25% tax rate versus last year’s 20% tax rate proposal Green Book.
As previously suggested in the Biden Green Books, gratuitous transfers would become recognition events for income tax purposes. Income tax liability would be in addition to potential transfer taxes. Last year’s proposal, which made some taxpayer-friendly changes from the original proposal, essentially returns in this year’s Green Book. There is a $5 million profit exclusion per donor/deceased transferrable to a surviving spouse. This will exclude many taxpayers from applying this new double taxation regime, but HNW individuals will still be affected.
The 2024 Green Book also brings with it new proposed taxes targeting HNW individuals. It proposes changes to the Net Capital Gains Tax (NIIT) as well as changes to the Medicare tax. Specifically, the tax rate for the NIIT will increase by 1.2% for taxpayers with incomes greater than $400,000 (from 3.8% to 5%), and the Medicare tax will also increase by 1.2% for those with an income Income increased by over $400,000. There is a related proposal to expand what earnings are subject to the NIIT by closing the loophole that previously protected the earnings of certain pass-through businesses.
Other notable income tax increases for HNW individuals in the 2024 Green Book Proposed by the Biden administration in each of its green papers include raising the upper marginal tax rate on ordinary income to 39.6% for single taxpayers earning more than $400,000 and married taxpayers making joint incomes over $450,000 submit an application. There is also a proposal to tax long-term capital gains and qualifying dividends at ordinary income tax rates, which along with other changes would result in a 44.6% tax rate for taxpayers with incomes over $1 million.
Grantors Trusts
The Grantor Trust Rules have proven effective in providing transfer tax planning by generally disregarding transactions between the grantor and the grantor trust for income tax purposes and exhausting the grantor’s assets by requiring the grantor to meet the tax liabilities attributable to the grantor trust merits. Because of its effectiveness, Democrats have proposed a number of changes that would discourage its use as a transfer tax planning tool.
As suggested last year, Income tax payments payable by the grantor under the Grantor Trust Rules would henceforth be treated as taxable gifts to the trust. The value of the gift is determined as at 31 December in each year, the gift being the sum of all income taxes paid less any reimbursements made by the trust to the donor. A technical addition to this year’s proposal is a sentence clarifying that the gift cannot be reduced by the marriage deduction, charity deduction, or various gift exclusions under Sections 2503(b) and 2503(e) of the Internal Revenue Code. The proposal specifically excludes revocable trusts from this rule. In addition, the Proposal would treat transfers of an asset between a grantor and a grantor trust for income tax purposes, whereby sales and payments to meet an obligation make recognition events that trigger a capital gain (losses would not be recognised). .
