Editor’s Observe: That is the primary of three components on the affect of the 2024 Inexperienced E book on belief and property planning.

On March 9, the Biden administration launched its proposed funds calling for a rise of trillions in federal spending alongside along with his proposed offsetting income raisers in Basic Explanations of the Administration’s Fiscal 12 months 2024 Income Proposals (the 2024 Inexperienced E book.) Given the divided Congress, the possibility of many and even any of those proposals turning into regulation now seem distant. Nonetheless, it’s essential for tax advisors to grasp the proposals to have the ability to deal with consumer questions prompted by the headlines on the proposed elevated taxes on excessive internet value people.

            Right here’s a abstract of the important thing provisions affecting belief and property planning:

“Honest Share” Getting Larger

The 2024 Inexperienced E book requires trillions of latest authorities spending and reducing the deficit by trillions, which essentially interprets to considerably extra income within the type of taxes. President Joe Biden states in his funds message that “[w]e greater than totally pay for these investments in our future by asking the rich and massive companies to pay their justifiable share.”

The one proposal that can achieve a lot consideration once more is the “billionaire minimal tax,” which is a tax imposed by advantage of wealth however isn’t itself a wealth tax. As an alternative, it imposes a minimal tax fee on earnings, positive factors and unrealized positive factors of people who’ve greater than $100 million (not a billion). The proposal features a provision phasing within the tax for these over $100 million however below $200 million, having the tax imposed on unrealized achieve be accessible as a credit score when the asset is bought and permitting for installment funds. This yr’s proposal requires a 25% tax fee, up from the 20% tax fee proposal in final yr’s Inexperienced E book.

As beforehand proposed within the previous to Biden Inexperienced Books, gratuitous transfers would grow to be recognition occasions for earnings tax functions. The earnings tax legal responsibility can be along with the potential switch taxes. Final yr’s proposal, which had made some taxpayer-friendly adjustments from the unique proposal, returns to this yr’s Inexperienced E book substantively the identical. There’s a per donor/decedent $5 million exclusion on achieve that’s transportable to a surviving partner. This can take away many taxpayers from the appliance of this new double taxation system, however HNW people will stay impacted.

The 2024 Inexperienced E book additionally brings new proposed taxes focused at HNW people. Modifications are proposed to the web funding earnings tax (NIIT) in addition to mirroring adjustments for Medicare tax. Particularly, the tax fee for the NIIT be raised by 1.2% for taxpayers with greater than $400,000 of earnings (going from 3.8% to five%) and the Medicare tax may also be elevated by 1.2% for these with earnings over $400,000. There’s a associated proposal to develop what earnings is topic to the NIIT by closing the loophole that’s beforehand protected earnings from sure pass-through entities.

Different notable earnings tax hikes for HNW people within the 2024 Inexperienced E book which were proposed by the Biden administration in every of its Inexperienced Books embrace rising the highest marginal fee for odd earnings to 39.6% for single taxpayers incomes greater than $400,000 and married taxpayers submitting collectively with earnings above $450,000. There’s additionally a proposal to tax long-term capital positive factors and certified dividends at odd earnings tax charges, which when taken along with different adjustments would lead to a tax fee of 44.6% for taxpayers with greater than $1 million of earnings.

Grantor Trusts

The grantor belief guidelines have lent themselves to efficient switch tax planning by permitting transactions between the grantor and the grantor belief to be typically disregarded for earnings tax functions and in depleting the grantor’s property by obligating the grantor to cowl the tax liabilities attributable to the grantor belief’s earnings. Due to their effectiveness, Democrats have proposed a wide range of adjustments that might disincentivize their use as a switch tax planning software.

As proposed final yr, the earnings tax funds required to be made by the grantor below the grantor belief guidelines can be handled as taxable items to the belief going ahead. The worth of the reward can be decided as of Dec. 31 of every yr, the place the reward would be the sum of all earnings taxes paid much less any reimbursements made to the grantor by the belief. A technical addition to this yr’s proposal is a sentence clarifying the reward can’t be diminished by the marital deduction, charitable deduction or varied reward exclusions below Inner Income Code Sections 2503(b) and 2503(e). The proposal explicitly excludes revocable trusts from this regime. As well as, the proposal would deal with transfers of an asset for consideration between a grantor and a grantor belief to be regarded for earnings tax functions, thereby making gross sales and funds in satisfaction of an obligation recognition occasions triggering a capital achieve (losses can be disallowed).