CSG Law Alert: President Biden Unveils Tax Proposals for 2025 in Annual Green Book

The Biden Administration released its 2025 tax proposals in the annual Green Book on March 11, 2024. As expected, because one of the Biden Administration’s tax goals is to “ensure the wealthy and large corporations pay their fair share,” many of these proposals include changes to the tax regulations for trusts and estates. These proposals are outlined below.

Annual Exclusion

Currently, a taxpayer can freely make gifts of $18,000 to as many individuals as he or she desires without incurring any gift tax. So long as each gift is $18,000 or less, the gift will not be taxed. Each gift of $18,000 or less can be gifted to unlimited recipients. Gifts can also be made in trust so long as the gift comports with the present interest requirements, which requires the taxpayer to notify the recipient each time a gift is made in trust.

The proposed regulations would eliminate the annual gift exclusion and instead cap the total tax-free monetary gift a taxpayer can make per year to only $50,000. It would also remove the requirement for a present interest. This proposal would significantly limit taxpayers from making tax-free gifts, outright or in trust.

Treat Lifetime Gifts and Testamentary Transfers as a Recognition Event

Traditionally, taxes are imposed when there is some kind of recognition event, such as a sale, on which a gain is realized. Transfers at death and lifetime gifts are generally not deemed realization events for which taxes can be imposed. The Biden Administration’s proposal would treat transfers of appreciated property by gift or upon death as a realization event, which would trigger a capital gain for the donor or the decedent’s estate.

This proposal contains several exclusions, such as tangible personal property that includes household furnishings and personal effects (not including collectibles). It would also exclude transfers to a U.S. spouse or charity. Because collectibles, such as artwork, are excluded from this proposal, the practicality of imposing this regulation on illiquid assets could become onerous and costly for taxpayers.

Under this revenue proposal, property held in trust, partnerships or other non-corporate entities would also be subject to taxation on unrealized appreciation unless the property has already been subject to a recognition event within the prior 90 years.

The proposal would provide for a $5 million per-donor exclusion on the recognition of unrealized capital gains on property transferred during life. It would only apply once the donor has used his or her lifetime gift exemption.

Grantor Retained Annuity Trusts (“GRAT”)

The Biden Administration has proposed major changes to GRAT rules in 2025, which would effectively disallow a zeroed-out GRAT. A zeroed-out GRAT is a technique that allows a grantor to freeze the value of an asset that is placed in trust, which can then grow indefinitely.

A GRAT is a statutorily approved estate planning tool that permits a grantor to transfer likely-to-appreciate assets to trust while retaining the right to annuity payments for a short term of years. At the end of the annuity term, the remainder passes to remainder beneficiaries in further trust.  So long as the grantor does not die before the GRAT term ends, the appreciation of the asset is removed from the grantor’s estate for the purposes of federal estate tax.

The 2025 tax proposals would require the GRAT to retain a minimum value equal or greater than 25% and to have a minimum term of 10 years. This would essentially restrict a grantor from being able to zero-out a GRAT. If enacted by Congress, these proposed regulations would apply to all GRATs created on or after the date of enactment.

Other Changes for Grantor Trusts

Payment of Taxes

One fundamental characteristic of grantor trusts relates to the payment of the trust’s income taxes, which are paid by the grantor. Instead, the 2025 proposals would treat these payments of income tax on the trust’s income as a taxable gift for which a 40% gift tax would be imposed on the grantor.

Substitution of Assets

Another beneficial feature of a grantor trust involves the grantor’s ability to swap low basis assets for high basis assets. This allows an estate to take advantage of the step-up in basis upon the grantor’s death. The 2025 proposals would treat the substitution of assets as a recognition event.

Sale to an Intentionally Defective Grantor Trust (“IDGT”)

An IDGT is an irrevocable trust that is treated as a grantor trust for federal income tax purposes. This planning tool allows a grantor to sell likely-to-appreciate assets to his or her IDGT. For tax purposes, this sale is treated like a sale to oneself, which means that the grantor is not liable for capital gains taxes or other federal income taxes on payments the grantor receives.

The Biden administration has proposed treating these sales as taxable events from which the grantor would recognize gain.

Generation Skipping Transfer (“GST”) Tax

The proposals also include changes for the GST tax rules to prevent the accumulation of assets that appreciate in a dynasty trust. A dynasty trust allows a high-net-worth families a way to preserve assets for many generations without triggering estate, gift or GST taxes. The Biden administration’s proposal would restrict the GST allocation to only the grantor’s grandchildren, which would prevent the indefinite growth of the assets in the trust from occurring. Further, this proposal would apply not only to newly created trusts as of the date of the proposal’s enactment, but to all previously created trusts.

Valuation Discounts

Valuations are regularly used in estate planning to determine values of difficult to value assets, such as stock shares held in closely held businesses. Currently, the IRS allows for valuation discounts, such as discounts for lack of marketability and lack of control for this type of transaction. The 2025 revenue proposals include provisions for reducing or eliminating these discounts for transfers between family members when the family has at least a 25% interest in the property.

Drafting Updates: Defined Formula Clauses

Biden’s Green Book also includes a proposal to restrict defined value formula clauses, which practitioners often use in drafting to avoid triggering gift tax liability. While the proposal does not completely restrict the use of a defined formula clause, it proposes that the value be determined by a method that does not involve the IRS.

Increased Reporting Requirements for Trusts

The Biden administration also proposes new trust reporting requirements for trusts worth more than $300,000 or whose gross income exceeds $10,000. For most clients, these threshold levels are so low that nearly all trusts will be impacted. Additionally, under this proposal, the IRS would require trustees to report the value of trust assets each year.

Capital Gains

For any taxpayer who sells a taxable investment held for longer than one year, such as stocks or real estate, any appreciation above the asset’s basis is taxed at the preferred capital gains rate, which is 0%, 15%, or 20% depending on your filing status and taxable income.

The Biden administration proposes limiting capital gains rates to only those taxpayers whose taxable income is less than $1 million. Instead, for taxpayers whose taxable income is greater than $1 million, the taxpayer’s ordinary rate would apply, which is 37% in 2024. The Biden administration has additionally proposed raising this top rate to 39.6%.

Conclusion

Given the political climate and uncertainty with the upcoming presidential election, it remains to be seen whether Congress will enact any of these proposals. Enacting any of these changes will have serious consequences on estate and tax planning.

While we do not know which of these proposals, if any, Congress will enact, taxpayers can act now by speaking to a trusts and estates attorney to make plans on which they can comfortably rely.

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