The Biden Administration released its “General Explanation of the Administration’s Fiscal Year 2023 Revenue Proposals”[i] on March 28, 2022. The Proposals reflect the policy priorities of the Biden Administration and recommend several significant changes to the existing estate, gift, and income tax systems, some of which were previously introduced but not enacted. Congress will again ultimately decide whether or not to implement those changes. The U.S. Treasury Department released its explanation of the Proposals in its Green Book on the same date.[ii]

We will continue to monitor whether or not any of these proposals are offered into legislation. While they are being considered, it is important to understand how they could impact your current estate plan, and speak with your attorney to determine if there are any adjustments that should be made, dependent on your individual situation.

The highlights of certain parts of the proposals are as follows:

Tax Proposals

• Transfers of property by gift or by death would be realization events that trigger capital gains tax to be due. The amount of the gain realized would be the excess of the asset’s fair market value on the date of the gift, or date of death over the transferor’s basis in that asset. The tax imposed on gains deemed realized at death would be deductible on the decedent’s estate tax return.
• Certain exclusions would apply. For example, transfers to a U.S. citizen’s spouse or to a charity, would carry over the basis of the donor or the decedent. Capital gain would not be recognized until the death of the surviving spouse (or until the surviving spouse otherwise disposes of the asset). Additionally, the proposal allows a $5,000,000 per-donor exclusion from gain realized on property transferred by gift or by reason of death. This exclusion amount will be indexed for inflation after 2022.
• Gain on unrealized appreciation would be recognized by a trust, partnership, or other non-corporate entity that is the owner of property, if that property hasn’t had a realization event within the prior 90 years, starting December 31, 1939. The first deemed recognition event would therefore occur on December 31, 2030.
• The proposals also include several deferral elections.
  • Taxpayers could elect not to recognize unrealized appreciation of certain family-owned and operated businesses until the interest in the business is sold or otherwise ceases to be family-owned and operated.
  • Tax on appreciated illiquid assets can be paid over fifteen years in a fixed-rate payment plan.
• Transfers to or from a trust or a partnership will be deemed to be recognition events (excluding transfers from revocable trusts).
• Limit the applicability of the generation-skipping transfer tax exemption to two generations below the transferor or those alive at the creation of the trust.
• These new rules will be applicable to gifts made after December 31, 2022 or for persons dying after December 31, 2022.

Grantor Trust Proposals

• Payment of the income tax on the income of a grantor would be treated as a gift unless the deemed owner is reimbursed by the trust during that same year. The amount of the gift would be the unreimbursed amount of the income tax paid.
• For trusts that are not revocable, a sale of an asset between a grantor and a grantor trust would be considered a taxable event.
• These proposals would apply to all trusts created on or after the date of enactment.

Grantor Retained Annuity Trust (“GRAT”) Proposals

• GRATs will be required to have a minimum term of 10 years and a maximum term of the life expectancy of the annuitant, plus 10 years.
• The remainder interest in a GRAT must have a minimum value for gift tax purposes equal to the greater of 25% of the value of the assets transferred to the GRAT or $500,000 (but not more than the value of the assets transferred).
• Decreases in the annuity payment would be prohibited.
• The grantor of the GRAT would be prohibited from acquiring in exchange an asset held in the GRAT (i.e., exercising a “swap power”), without recognizing gain or loss for income tax purposes.
• These proposals would apply to all GRATs created on or after the date of enactment.

Trust Reporting Proposals

• The proposal would require certain trusts to report to the IRS on an annual basis to disclose the name, address, and taxpayer identification number of each trustee and grantor of the trust, and to provide general information with regard to the nature and estimated total value of the trust’s assets.
• This reporting requirement for a taxable year would apply to each trust whose estimated total value exceeds $300,000 or whose gross income for the taxable year exceeds $10,000.

If you have any questions, please contact your Hinckley Allen attorney.

[i] Budget of the United States Government, Fiscal Year 2023 (whitehouse.gov)

[ii] General Explanations of the Administration’s Fiscal Year 2023 Revenue Proposals (treasury.gov)