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Biden’s 2023 Green Book Part 2: HNW Planning Techniques

On March 28, the Biden administration issued its second set of proposals to raise the desired revenue. General explanation of the administration’s revenue proposals for the financial year 2023, (Tea 2023 green book.) These proposals represent the administration’s first comprehensive tax proposals since Build Back Better failed to move forward in Congress late last year. For tax consultants, green book There are always interesting offers for both what’s included and what isn’t. While these proposals may not go ahead, especially given the current Congress, it is useful to see what topics are being considered and to be able to address customer concerns with regard to the proposals.

In our previous article, we tackled the billionaire tax-grabbing title, and in a later piece, we’ll address some of the proposed trust and estate administration changes. In this piece, however, we’ll unpack proposals related to several popular tax planning techniques used by high-net-worth (HNW) individuals, which are far more detailed than Biden previously thought. Green Book.

Keeping Income Taxes on Top of Transfer Taxes

Primary proposal for the purpose of estate planning in 2022 green book reappears in 2023 Green Book, In short, the maximum holding period for death, lifetime gifts and assets in trusts will be recognition events for income tax purposes. The resulting income tax liability will be in addition to potential gift, estate and generation-skipping transfer (GST) taxes. The essence of the proposal is the same as last year. However, there were two updates that addressed some of the criticisms of the initial proposal worth noting here. First, the exclusion on benefits is increased from $1 million per donor/deceased to $5 million, and remains portable to a surviving spouse. This will remove most of the taxpayers from the application of this new double taxation system. Second, there has been some relaxation in the rules of assessment exemption. The original proposal stated that the value of the partial interest would only be proportional to the value of the whole interest. This means that non-controlling interests in businesses operating with third-party owners will be valued much higher than the fair market value (FMV) of the interest for purposes of this tax. This year’s resolution “does not include an interest in a trade or business to the extent that his assets are actively used in the conduct of that trade or business” by the necessary negation of a reasonable exemption, which was tax deferred. 2022 green book To be paid on sale of business interest or on winding up of family owned business.


Tea 2023 green book The proposal would substantially limit the tax benefits of grantor-retained annuity trusts (GRATs) by calling for changes previously proposed by the Obama administration. in each of the Obama administrations green books, there were proposals targeting the use of GRATs. last two Obamas green books, was issued in 2015 and 2016, calling for the abolition of both short-term GRAT and the so-called “zero-out” GRAT, where the value of retained annuity interest was equal to the value of the assets transferred, resulting in a taxable The gift was or close to zero. Obama Green Book proposals have appeared elsewhere, including both Senator Sanders and Senator Warren’s related gift and estate tax proposed legislation,

While these proposals were not from last year green book Or make better laws, they’re back now 2023 Green Book With this year’s edition. The proposal seeks to achieve this by requiring: (1) the duration of a GRAT must be at least 10 years, (2) that a GRAT lasts no more than the grantor’s life expectancy by 10 years, and (3 ) that the remaining interest (that is, the amount of the taxable gift) exceeds (a) 25% of the value of the contributed assets, or (b) $500,000 (although this latter amount is limited to the value of the gift). , Transactions between GRAT and the taxpayer in these proposals will also be recognition programs for income tax purposes.

grant trust

The Grantor Trust Rule, once an anti-abuse provision, has been one of the most frequently used provisions of the Internal Revenue Code for estate planning, allowing the trust to be income tax-free, with funds directly to the grantor. Income tax liability has to be paid. which would have otherwise been included in the grantor’s gross assets and enabling tax-free transactions between the grantor and the grantor trust. Prior to Build Back Better, there were a number of legislative proposals that were based on Obama administration proposals for estate tax savings by selling any assets that were included in the taxpayer’s estate or exchanging it with a grantor trust. were designed to limit its use. Then, the House Ways and Means version of Build Back Better went a step further by including property at the time of death. 2022 Green Book Proposal to treat the sale or exchange between the grantor and the grantor trust as an income tax recognition event, irrespective of the status of the grantor trust.

Tea 2023 Green Books The proposals focus on the income tax nature of grantor trusts rather than Obama administration-inspired proposals that use an estate tax. What is completely new this year is that income tax payments made by the grantor under the grantor trust rules will be treated as a gift to the trust going forward. The value of the gift shall be determined as of December 31 of each year, where the gift shall be the sum of all income taxes paid by the Trust less any reimbursements made to the grantor. The proposal explicitly excludes revocable trusts from this arrangement and effectively ignores the specific irrevocable life insurance trust that holds only non-income generating life insurance policies.

Promissory Note Valuation

A common estate-planning technique, especially in recent years due to low Internal Revenue Service fixed interest rates, is intra-family loans and/or sales. In these transactions, a taxpayer provides assets to a related party (such as a family member but more often a trust for the benefit of a family member) in exchange for a promissory note that does not have the minimum interest rate required for the loan. Is. Will be treated as below market debt under the tax code. As a result of the exchange of assets for a loan that is not considered below market, the promissory note for gift tax purposes is valued at its face value, which is the property as a gift under IRC section 2512 principles. prevents transfer. If the promissory note is subsequently gifted or incorporated into the property of the lending party, that promissory note must be revalued under the FMV standard. The Treasury Department is concerned that some taxpayers take a position that “relies on statutory rules that the debt is not below market for gift tax purposes at the time of the transaction and on underlying economic characteristics to assert the debt.” Below market for post-wealth tax purposes. That is, promissory notes are valued at the outstanding face value minus the present value discount and the increased interest due to any increase in then-applicable rates. proposed in its 2015-2016 priority guidance plan, but has omitted regulatory action on such noted valuations since the 2017-2018 plan.

While the Biden administration has not returned the proposal to its priority guidance plan, it did add the proposal to its 2023 green book (Possibly indicating a belief that a statutory change is needed). The proposal states that if the promissory note was originally held to have a sufficient rate of interest so as to avoid any interest as income or any part of the transaction treated as a gift, So the interest rate from the loan for future valuation purposes will be the higher of: (1) the interest rate mentioned in the promissory note or (2) the IRS published rate applicable on the date of appraisal. In addition, for valuation purposes, the loan should be considered short-term to avoid the application of an exemption. This proposal shall come into force with immediate effect on any valuation after the date of enactment, regardless of whether the promissory note has been issued.

Dissolution of GST free trust forever

Trusts that can exist permanently under local law and are exempt from GST are often referred to as “dynastic trusts” because they allow family assets to be transferred over generations free of taxes. Previous proposals by Democrats have sought to reduce these dynasty trusts by ending the exemption status after a set number of years from the creation of the trust. The Obama administration proposed that the trust’s incorporation ratio would automatically become one 90 years after the trust was created. While not part of the Build Back Better proposals, other Democratic legislative proposals in 2021 called for exemption status for the trust to expire at Anniversary. This year’s Biden administration proposal similarly seeks to change the inclusion ratio, but with reference to the beneficiary, not in the context of establishing a trust. Under the Biden proposal, the GST tax exemption status would apply only to “beneficiaries not more than two generations below the transferor, and to the younger generation of beneficiaries who were alive in the creation of the trust…” To put in the vernacular, If you are looking at a donor’s linear descendants, only transfers are made to the taxpayer’s children, grandchildren and those great-grandchildren (or minors) who were alive at the time of the trust’s creation. This change will be applicable to both pre-enactment and post-enactment trusts. However, for the purposes of this proposal, pre-enactment trusts shall be deemed to have been created on the enactment date to identify which beneficiaries are alive.

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