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George F. Bearup, J.D. Senior Legal Trust Advisor

26-Apr-22

Administration’s 2023 Proposal Updated

Take-Away: The Treasury Department’s tax proposals to generate revenues as part of the 2023 budget appear to be pretty much the same as many of the tax law proposals we read about in 2021, with only a few modest alterations.

Background: In the Treasury Department’s General Explanations of the Administration’s Fiscal Year 2023 Revenue Proposals (often referred to as the Greenbook) released on March 28, 2022, many of the proposals from last year’s Greenbook resurfaced. With a highly divided Congress, it is pretty unlikely that many, if not all, of these revenue proposals will be adopted later this year as part of the 2023 federal budget.  A quick summary of some of these repeat-proposals follows:

  • Millionaire’s Tax: Minimum tax of 20% on total income, including unrealized capital gains for individuals with ‘wealth’ greater than $100 million, either paid in equal annual installments over 9 years for the first year’s tax, and over 5 years for each subsequent year’s tax;
  • 6% Income Tax Rate: Accelerate the return of the 39.6% federal income tax rate but which would apply to incomes of $450,000 for joint returns ( or $400,000 for single taxpayer returns);
  • Deemed Realization: Deemed realization of capital gains on transfers of gifts or at death, as taxable income to the decedent or to the donor, but excluding: (i) tangible personal property; (ii) intra-spousal transfers; (iii) transfers to charities; and (iv) $5 million exclusion per person, the exclusion being portable to a surviving spouse;
  • Capital Losses: Capital losses and carry-forwards would be allowed as offsets to capital gains and up to $3,000 of reported ordinary income;
  • Limited Valuation Discounts: Entity level discounts would be denied, other than with respect to ‘trades or businesses’ to the extent its assets are actively used in the conduct of that trade or business;
  • Sales to Grantor Trusts: For trusts that are not fully revocable by the deemed owner, the transfer of an asset between the grantor trust and its deemed owner would result in the recognition of gain;
  • Payment of Income Tax by Deemed Owner: The payment of the income tax liability of the grantor trust by its deemed owner would be a taxable gift by the deemed owner, unless the deemed owner is reimbursed by the trustee during that same year;
  • GRATs: Grantor retained annuity trusts would have: (i) a minimum 10-year term; (ii) a maximum term of the life expectancy of the annuitant plus 10 years; (iii) a prohibition on any decrease in the annuity paid during the GRAT term; (iv) a minimum remainder value of 25% of the GRAT’s assets or $500,000, thus eliminating zeroed-out GRATs; and (v) a prohibition of the grantor reacquiring any asset from the GRAT in an exchange without recognizing gain or loss on that exchange; and
  • GST Exemption: The generation skipping transfer tax (GST) exemption would be limited. The GST exemption would apply only to: (i) direct skips and taxable distributions to beneficiaries no more than two generations below the transferor, g. it would apply to grandchildren but not to distributions to great-grandchildren of the transferor, and to younger generation beneficiaries who were alive at the creation of the trust; and (ii) taxable terminations that occur while any person described in (i) is a beneficiary of the trust.

Proposals for Trusts and Entities: In addition to the above proposed changes to the tax laws that would affect estate planning, the 2022 Greenbook also contains proposals that change how trusts and other entities, e.g. LLCs, would be administered and taxed. A short summary of some of these proposals include the following:

  • Recognition Events: Transfers to and distributions in-kind from a trust would be a recognition event unless the trust is a grantor trust deemed wholly owned and revocable by the ‘donor;’ a distribution from a revocable trust would recognize gain on the unrealized appreciation in any asset that is distributed, unless the transfer is in discharge of the deemed owner’s obligation to anyone other than the deemed owner or the deemed owner’s spouse; this recognition event would also apply to entities other than trusts if the transfers ‘have the effect of a gift to the transferee’;
  • Mark-to-Market: A 90-year mark-to-market rule would be applied, going back to trusts that were created after 1939, which means that this mark-to-market gain recognition rule would start in 2031; and
  • Tax Deferral: Individuals could elect not to recognize unrealized appreciation of certain family-owned and operated businesses until the interest in the business is sold or the business ceases to be family-owned and operated; in addition, the Greenbook would allow a 15-year fixed-rate installment payment plan for the tax on appreciated assets transferred at death, other than: (i) liquid assets; (ii) publicly-traded financial assets; and (iii) other businesses assets for which a deferral election is made.

Conclusion: It is probably best to describe this as the Administration’s ‘wish list,’ but it realistically understands that it is highly unlikely to be seriously considered by a polarized Congress and in an election year.