The Biden administration released its vision for the 2023 federal budget earlier this year at https://home.treasury.gov/system/files/131/General-Explanations-FY2023.pdf]. There are many proposals that affluent families should be aware of. On the income tax side, the administration hopes to:

• restore the top 39.6% tax rate beginning in 2023;
• tax long-term capital gains and dividends as ordinary income for those with taxable income greater than $1 million;
• treat transfers of appreciated property by gift or at death as realization events, triggering capital gains taxes; and
• impose a new minimum tax of 20% for those with wealth of $100 million or more, to be applied to total income and unrealized capital gains. Such gains would only be taxed once.

Proposed changes in the estate and gift tax arena are likely of concern to more families, especially considering that the amount exempt from the federal estate tax will be cut in half in 2026.

GRATs. Grantor Retained Annuity Trusts would be required to have a term of at least ten years, and the minimum value for gift tax purposes would be the greater of 25% of the value of the assets or $500,000 (but not more than the value of the assets transferred). If the grantor acquired a trust asset in exchange, gain or loss would have to be recognized for income tax purposes.

Grantor trusts. One of the useful tax benefits of a grantor trust is that the payment of the trust’s income tax obligations by the grantor is not a taxable gift, even though the trust beneficiaries enjoy an economic benefit (and the grantor’s taxable estate is reduced). This rule would be reversed, and such payments of income tax would be taxable gifts unless reimbursed by the trust.

Promissory notes. The administration is concerned that taxpayers may rely upon IRS-provided interest rates on promissory notes for gift tax purposes, but then look to market rates for valuing the same note after a death. A new consistency requirement would head off such strategies.

GST trusts. When the generation-skipping transfer tax was adopted, all the states had rules against perpetuities. That has changed, creating the possibility of a private trust that is shielded from the estate and gift tax for many generations, perhaps permanently in some cases. To combat such forward-looking tax planning, the proposal would limit the availability of the GST exemption to “direct skips and taxable distributions to beneficiaries no more than two generations below the transferor, and to younger generation beneficiaries who were alive at the creation of the trust” and to taxable terminations for such beneficiaries. Significantly, there is no “grandfathering” protection for older trusts. For purposes of this rule, trusts created before enactment of the new rule would be deemed to have been created on the date of enactment.

Whether any of these proposals will make it through Congress this year is uncertain at this time.

Do you have a question concerning wealth management or tax notes? Call us at 920-563-6616 ext. 3070, or email wealth@bankwithpremier.com.