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Following the recent tax proposals ensures advisors stay ahead of potential game-changing developments
The Biden administration recently released its tax proposals in the General Explanations of the Administration’s Fiscal Year 2022 Revenue Proposals – otherwise known as the “Green Book.”
The proposals categorize death, lifetime giving and exceeding maximum holding periods for assets in trust as recognition events for income tax purposes. If approved, these proposals would have a dramatic impact on estate planning for high-net-worth (HNW) individuals. For example, gifts and transfers at death would become recognition events. And the recognition of gain on transfers to and from trusts as well as a periodic recognition of gain for assets held in trusts that reach maximum holding periods. The resulting income tax liability would be in addition to potential gift, estate and generation skipping transfer taxes.
Of course, there are several exclusions to the recognition of gains within the new proposals including exclusions for tangible property, principal residence, qualified small business stock (QSBS) and surviving spouses. For additional details on the exclusions included, please refer to the wealthmanagement.com article, “The Estate Planning Implications of Biden’s Recently Issued Green Book.”
Deferrals and valuation rules
President Biden’s proposal allows for a 15-year payment plan on the tax liability for all non-liquid assets and allows for an indefinite deferral for family-owned and operated businesses that will only be due when it’s no longer family-owned and operated. Regarding valuations, the fair market value for recognition purposes will be the same value used for estate and gift tax purposes.
However, “a transferred partial interest would be its proportional share of the fair market value of the entire property.” This stipulation will need to be addressed by advisors as it may impact the application of valuation discounts during transfers.
Regarding the timing for the potential changes, the proposal calls for gain recognition provisions to apply for all gifts and deaths occurring in 2022 or later.
The Biden proposal would limit the benefits and flexibility of planning with intentionally defective grantor trusts (IDGTs). The treatment of transactions between the grantor as nonrecognition events will be impacted as the Biden proposal treats these transfers as recognition events.
For trusts that include assets that are sold periodically, the administration’s proposals shouldn’t create significant tax issues. However, trusts that hold real estate or closely-held businesses, may have a considerable liability. With the potential tax increases as well as more robust reporting obligations found in the Biden proposal, developing a comprehensive estate planning strategy is more critical than ever.
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