The Biden Administration's FY 2023 Budget and Treasury Greenbook, released March 28, 2022, propose changes to the rules for taxing certain individuals, estates and trusts, as well as broadening the circumstances under which capital gains become taxable. The proposed changes include:

• Increasing the top tax rate for individuals to 39.6%
• Imposing a minimum tax on wealthy individuals
• Taxing some capital gain at ordinary income tax rates
• Expanding triggering events for capital gains recognition
• Modifying rules for certain grantor trusts
• Modifying tax administration for trusts and estates
• Taxing IRC Section 1250 property as ordinary income
• Taxing carried interest as ordinary income
• Limiting like-kind exchanges

The Administration's Budget proposal folds most of the House-passed Build Back Better Act (BBBA) into the baseline and assumes it has been enacted, a move likely intended to avoid upsetting any blossoming negotiations later this spring or summer on a post-BBBA reconciliation bill after the House measure stalled in the Senate. This means most tax-related spending and other BBBA provisions are omitted; other major tax increase proposals are included, even though Congress has little appetite for passing some of them. Examples of these proposed tax hikes include increases in the corporate and individual tax rates that were previously proposed by the Administration or congressional Democrats but later rejected as the BBBA was put together in the House.

Part 1: Reforming individual income tax

Increasing the highest individual income tax rate

The Administration's budget proposes raising the top marginal rate, for tax years beginning in 2023 and after, to 39.6% for: married individuals filing jointly with taxable income exceeding $450,000; heads of household with income exceeding $425,000; single individuals with income exceeding $400,000; and married individuals filing separately who have income exceeding $225,000. These amounts would be indexed for inflation after 2023.

Implications. This proposal is an identical provision from last year's Greenbook released in May 2021. (For our commentary, see Tax Alert 2021-1129.)

The Administration eventually dropped the proposed increase to the top rate when Senator Kirsten Sinema (D-AZ) refused to support any legislation that increased individual tax rates. At this point, there is no reason to believe the opposition to these proposals within the party has changed.

Even if the proposal to increase the top rate on ordinary income does not become a reality, that rate is slated to return to 39.6% in 2026, when changes made by the Tax Cuts and Jobs Act (TCJA) expire. In addition to raising the top individual rate, the President's budget proposal would lower the threshold at which the top rate takes effect; to illustrate, the 2022 top rate of 37% applies once taxable income exceeds $539,900 for a single filer and $647,850 for those married filing jointly. The budget proposal would impose a top rate of 39.6% once taxable income exceeds $400,000 for a single filer and $450,000 for married individuals filing jointly.

Reforming the taxation of capital income

The Administration's budget proposes to increase capital gains tax rates and modify what is considered a realization event.

Tax capital income for high-income earners at ordinary rates

The proposal would tax long-term capital gains and qualified dividends at ordinary income tax rates to the extent a taxpayers' taxable income exceeds $1m ($500,000 for married individuals filing separately), with these amounts indexed for inflation after 2023.

The effective date for the proposal would be the date of enactment.

Implications. This proposal is also identical to a provision from last year's Greenbook, released in May 2021. (For our commentary, see Tax Alert 2021-1129.) Given that this proposal was not adopted during the development of BBBA, it seems unlikely to get different reception in Congress this year.

Treat gifts and bequests of appreciated property as realization events

For appreciated property transferred by gift or bequest, capital gain would be realized at the time of the transfer. For transfers at death, a maximum of $3,000 in capital losses and carryforwards could be claimed on the decedent's final income tax return and any capital gains tax realized would be deductible on the estate tax return.

A trust, partnership or other noncorporate entity owning property that has not been the subject of a recognition event in the last 90 years would also be required to recognize gain on unrealized appreciation.

Generally, a transferred partial interest would be valued based on its proportional share of the fair market value (FMV) of the whole property.

Recognition events would include transfers of property:

• Into a trust and distributions in-kind from a trust, except for a grantor trust that is wholly owned and revokable by the donor
• To and by a partnership or other noncorporate entity if the transfers are effectively a gift to the transferee

Generally, the distribution of an asset from a revocable grantor trust would cause the deemed owner of the trust to recognize gain on any unrealized appreciation in the asset. Unrealized appreciation of the assets would be realized at the deemed owner's death or any other time when the trust becomes irrevocable.

Exceptions would include the following:

• Basis would carry over for transfers made to a US spouse or charity
• Capital gain would not be realized until the surviving spouse disposes of the asset or dies
• Appreciated property transferred to a property would be exempt from capital gains tax
• No capital gain would be recognized on personal property, except collectibles
• The principal-residence exclusion from capital gain would apply (currently $250,000 per person)
• Capital gain on certain small business stock would be excluded
• Up to $5m per donor would be excluded from recognition for unrealized capital gains on property transferred by gift during life
• Any remaining portion of this amount would be available for the estate to utilize at death
• The exclusion would also be portable to the decedent's surviving spouse, so a married couple would effectively have a $10m exclusion
• After 2022, the exclusion would be indexed for inflation

Available deferral elections would allow taxpayers to:

• Elect not to recognize unrealized appreciation of certain family-owned and -operated businesses until the business is sold or is no longer family-owned and -operated
• Pay the tax imposed on appreciated assets transferred at death by applying a 15-year fixed-rate payment plan, unless the assets are liquid or a business made a deferral election

The proposal would apply to property (1) transferred by gift and at death after December 31, 2022, and (2) owned by trusts, partnerships and other noncorporate entities on January 1, 2023.

Implications. These proposals are consistent with those originally set forth in the Administration's Build Back Better agenda. The changes to the income tax treatment of gifts and bequests were met with wide resistance from moderate Democrats and were soon abandoned.

Imposing a minimum income tax on wealthy individuals

The Administration proposes imposing a minimum 20% tax on the total income (generally including unrealized capital gains) of individual taxpayers whose wealth (defined as assets minus liabilities) exceeds $100m. Taxpayers would be permitted to pay the first year's minimum tax liability in nine equal, annual installments. For other years, a taxpayer could choose to pay in five equal, annual installments. Estimated tax payments would not be required.

The proposal seeks to avoid taxing the same gain twice by allowing payments of the minimum tax (referred to as prepayments) to be credited against subsequent taxes on realized capital gains. Any uncredited prepayments could be credited against capital gains taxes due upon a realization event, to the extent that the uncredited payments, reduced by any unpaid minimum-tax installments, exceeded 20% of unrealized gains.

A taxpayer's minimum tax liability would be reduced to the extent that the sum of liability and uncredited prepayments is greater than two times the minimum tax rate times the difference between the taxpayer's wealth and $100m. Thus, the minimum tax would fully phase in for taxpayers with wealth exceeding $200m.

Net uncredited prepayments that exceed a decedent's tax liability from gains at death would be refunded to the estate and included in the decedent's gross income. If the decedent was married when he or she died, the uncredited payments would be transferred to the surviving spouse.

Taxpayers with wealth exceeding $100m would be required to annually report to the IRS the total basis and estimated value as of December 31 for each asset class. Non-tradable assets would be valued based on the greater of the original or adjusted cost basis, the last valuation event from investment, borrowing, or financial statements, or other approved methods.

The provision would be effective for tax years beginning after December 31, 2022.

Implications. The minimum tax proposal is similar in many respects to one previously pitched by Senate Finance Committee Chair Ron Wyden (D-OR). Questions remain, however, as to the constitutionality and administrability of such a proposal. Soon after the budget was released, Senator Joe Manchin (D-WV) criticized the idea, effectively eliminating its chances of becoming law given the current composition of the Senate. As a fallback option, the version of the BBBA that passed in the House before stagnating in the Senate would impose a 5% surtax on adjusted gross income in excess of $10m and an additional 3% surtax on adjusted gross income in excess of $25m. The Joint Committee of Taxation estimates the surtax regime would raise $227b in additional revenue over the 10-year budget window, as opposed to $361b for the proposed 20% minimum tax.

At first blush, this appears to be one way — though complicated — to eliminate step-up in basis for high-end taxpayers. Because no legislative text accompanied the proposal, there are more questions than answers about how, if the gating constitutional questions can be overcome, the tax would actually work and interact with the existing tax code. Some questions that have come to mind in the days since the release include the following:

• What about unrealized appreciation before the effective date?
• What happens if you are in the $100m base one year and not the next?
• Will it work like the proposal set forth by Sen. Wyden — i.e., once you've satisfied the definition of a "billionaire" you'll be categorized as such going forward even if your asset value decreases?
• How do you determine if you are a "$100m household"?
• Must all assets be valued annually?
• How does attribution of trusts, children, etc. work?
• How would values of assets, such as noncontrolling interests, be determined for this threshold? Will valuation discounts apply?
• How are grantor trusts dealt with?
• How are nongrantor trusts dealt with?
• If they are standalone taxpayers, is the threshold going to be much lower?
• If they get attributed with an individual, is there going to be a consolidated-return concept so you can blend them together?
• How do charitable remainder trusts fit into all of this?
• Do we keep the current alternative minimum tax (AMT) system?
• When we compare the 20% AMT base to current tax — what is the current tax?
• Is it IRC Section 1? Or IRC Section 1 plus AMT? Plus net investment income tax (NIIT)? Plus SECA tax (Self-Employed Contribution Act)? Plus FICA tax (Federal Insurance Contributions Act)?
• How do credits work? Foreign tax credits? Business credits?
• Will net operating losses — and most other types of carryovers — be rendered largely useless because they will depress taxable income, and only cause you to pay more of this new minimum tax?
• Do we get basis in the asset's appreciation when this tax is paid?
• Does basis give rise to new depreciation/amortization? New IRC Section 743 adjustments? New IRC Section 465 at-risk considerations? Or cause the release of IRC Section 704(d)/1366(d) losses in pass-through entities?
• If it's net appreciation, do we have to step down basis for depreciating assets?
• Do we get a credit like in the current AMT system?
• How do you use it? What happens to it when you die?
• In a year in which a taxpayer experiences a large drop in value, will the taxpayers be eligible for refunds of previously paid minimum taxes?
• There is an ability to spread the payment over multiple years — are they going to treat it like the CARES Act self-employment tax relief and IRC Section 965, where they simply take overpayments to pay down the deferred balance?

Recapturing gain on IRC Section 1250 property

The proposal would treat any gain on IRC Section 1250 property held for more than one year as ordinary income to the extent of the cumulative depreciation deductions taken after the proposal goes into effect. Depreciation deductions taken before the effective date would continue to be subject to the current rules and only be recaptured as ordinary income to the extent depreciation exceeds the cumulative allowances determined under the straight-line method.

The unrecaptured gain tax rate is a flat 25%, as opposed to the capital gains rate, which is based on income. Uncaptured IRC Section 1250 gain applies to commercial real estate and residential rental properties and is the portion of the capital gain that has already been depreciated. For noncorporate taxpayers, any unrecaptured depreciation gain on IRC Section 1250 property is currently taxed using a maximum tax rate of 25%.

According to the Greenbook, the proposal would apply to noncorporate taxpayers with $400,000 or more in adjusted taxable income ($200,000 for married individuals filing separate returns). Partnerships and S corporations would have to determine the character of the gains and losses at the entity level and report to entity owners the relevant amounts for ordinary income (loss), capital gain (loss) and unrecaptured IRC Section 1250 gain under both the "new law" and the "old law.'"

The proposal would be effective for depreciation deductions taken on IRC Section 1250 property in tax years beginning after December 31, 2022, and for sales, exchanges, involuntary conversions or other IRC Section 1250 property dispositions completed in tax years after December 31, 2022.

Implications. This proposal would cause post-2021 depreciation deductions on real property to be recaptured upon sale at ordinary rates as high as 37% under current law. Query, however, whether as ordinary income, this recapture would be treated as qualified business income for purposes of IRC Section 199A. If so, the top rate on the recapture income in many instances would rise from 25% under current law to only 29.6% (37% x 80%). This arbitrage would expand, however, should the top ordinary rate increase to 39.6% as proposed, and should IRC Section 199A expire as scheduled at the end of 2025.

When combined with the prior capital gains provision, and the carried interest provision discussed later, this provision appears to only affect individuals/estate/trusts with incomes below the $1m threshold and not allocable to carried interests. It would also seem to apply to all taxpayers, even those below the $400,000 threshold.

It would also detrimentally affect estates and heirs inheriting real estate held in S corporations and partnerships without IRC Section 754 elections because the outside step-up in basis will generate a capital loss when the property is sold and the entity is liquidated, but the IRC Section 1250 gain giving rise to the post-death basis increase will be ordinary. Under current law, these would offset but under the proposal they would not, thus causing a non-economic tax increase followed by a capital loss carryover that may take years (or decades) to recover.

Finally, the change would not affect SECA tax or NIIT.

Taxing carried interest as ordinary income

The proposal would tax as ordinary income a partner's share of income on an "investment services partnership interest" (ISPI) in an investment partnership, regardless of the character of the income at the partnership level, if the partner's taxable income (from all sources) exceeds $400,000. Accordingly, this ISPI-related income would not be eligible for the reduced rates that apply to long-term capital gains. The gain recognized on the sale of an ISPI would generally be taxed as ordinary income, not as capital gain, if the partner is above the income threshold. In addition, the Administration's proposal would require partners in investment partnerships to pay self-employment taxes if their income exceeds $400,000.

The proposal would repeal IRC Section 1061 for taxpayers with taxable income (from all sources) exceeding $400,000 and would be effective for tax years beginning after December 31, 2022. The Greenbook states that the proposal is not intended to adversely affect the qualification of a real estate investment trust owning a profits interest in a real estate partnership.

Implications. Carried interest reform might be redundant considering the Administration's proposal to increase capital gains rates to ordinary income rates for high-income taxpayers. If the preference for long-term capital gain ends, the Administration's carried interest proposal would only affect a narrow subset of carried-interest recipients, namely profits-interest holders with taxable income below $1m (the threshold in the long-term capital gain proposal) and above $400,000 (IRC Section 1061 would still apply to those with income from all sources of $400,000 or less). This limited, partial repeal of IRC Section 1061 would lead to new tax complexities and compliance burdens as two different regimes could apply to thesame partnership, depending on the income thresholds of the partners.

The Administration's proposal differs from existing carried interest rules (IRC Section 1061 and its regulations) in several ways:

• The proposal converts what is otherwise long-term capital gain into ordinary income (IRC Section 1061 converts certain long-term capital gains into short-term capital gains taxed at ordinary rates)
• The treatment as ordinary income would apply regardless of the holding period (IRC Section 1061 generally applies to gains on dispositions of assets held for three years or less)
• Self-employment taxes would apply to this income

Private equity, private capital, and other alternative asset management funds and their professionals could face increased tax liabilities if either the carried interest proposal or the proposal to increase capital gains rates is enacted.

Modifying self-employment and net investment income tax reporting

The centralized partnership audit regime (BBA) treats income tax (Chapter 1) and SECA tax/NIIT (Chapter 2/2A) separately for reporting, tax calculation and assessment purposes, which requires multiple tax returns and dual enforcement proceedings. Currently, the IRS assesses adjustments affecting Chapter 1 at the partnership level and assesses adjustments affecting Chapter 2/2A at the individual partner level.

The proposal would amend the definition of a "BBA Partnership-Related-Item, which currently applies to Chapter 1 taxes, to include items that affect Chapter 2/2A taxes. The highest tax rate in effect would apply for the reviewed year under IRC Section 1401 or 1411.

The proposal would be effective after the date of enactment for all open tax years.

Implications. At first blush, it seems logical to include Chapter 2/2A taxes in the BBA procedure so that a single, uniform calculation of an individual's/estate's/trust's tax liability can be accomplished at the partnership level. However, this is more complicated than it may seem. We are only a few years into the adoption of the BBA audit regime (beginning in 2018), and there has not been adequate time for full audit cycles from the 2018–2019 years to work their way through from opening to closing. Once an adequate sample of audits from those years can be gathered and analyzed for the benefits and burdens felt by the IRS and taxpayer alike, the next logical step would be to amend the procedures to address any shortcomings in the current procedures. Only once the BBA system is fully tested and smooth operationally, should the merits of adding the Chapter 2/2A taxes into the BBA calculations be considered. For the time being, such a proposal appears to be a little premature.

Limiting like-kind exchanges

The proposal would allow the deferral of gain, up to an aggregate of $500,000 for each taxpayer ($1m for married individuals filing a joint return) each year for like-kind exchanges of real property. Taxpayers would recognize gains from like-kind exchanges exceeding $500,000 during a tax year (or $1m for married individuals filing a joint return) in the year they transfer the real property subject to the exchange.

The proposal would be effective for exchanges completed in tax years beginning after December 31, 2022.

Implications. Although IRC Section 1031 has been the subject of recent attention by both the Administration and Congress, IRC Section 1031 exchanges have been part of the Internal Revenue Code since 1921. The Congress that passed the TCJA limited IRC Section 1031 and considered eliminating the statute. So, we continue to see attention to like-kind exchanges.

Limiting the benefit of deferral to the extent proposed by the Administration would curtail a time-honored tax-savings strategy whereby a taxpayer exchanges appreciating real estate on a tax-free basis throughout his or her life while borrowing against the value. Upon the taxpayer's death, the heirs will take a stepped-up FMV basis in the real estate, and the appreciation will have escaped taxation completely. In this regard, the proposal to reduce the benefit available from deferral under IRC Section 1031 appears redundant, given the administration's proposal to also subject the appreciation inherent in one's assets upon death to income tax. In addition, when real estate is evenly exchanged and gain is recognized under the proposal, taxpayers may find themselves facing a tax bill with no corresponding cash generated from the transaction.

Part 2: Modifying estate and gift taxation

Modifying the rules for certain grantor trusts

The Administration's budget proposes changes to certain grantor trust rules to reduce the incentive to use these trusts to minimize estate, gift and income tax obligations.

The proposal would modify the rules for grantor retained annuity trusts (GRATs) by:

• Attaching a minimum value, for gift tax purposes, to the GRAT's remainder interest — the greater of (a) 25% of the value of the assets transferred to the GRAT or (b) $500,000
• Prohibiting any decrease in the annuity during the GRAT term
• Prohibiting the grantor from acquiring in an exchange an asset held in the trust without recognizing gain or loss
• Requiring the GRAT term to be between (a) 10 years and (b) the life expectancy of the annuitant plus 10 years

Implications. These provisions are not new and are a carryover from President Obama's budget proposals, as well as prior legislation. Currently, GRATs may be structured to have no gift tax consequences because the present value of the annuity payments to the grantor equals the FMV of the assets transferred to the GRAT. GRATs are especially useful when the taxpayer has little or no remaining gift tax exemption. The minimum value requirement would eliminate the ability to create a GRAT that does not have gift tax consequences, severely limiting its usefulness in an estate plan.

The prohibition of decreasing annuity payments would eliminate the "front-loading" of GRATs with other assets so that more of the main asset that is the target for using the GRAT is preserved for the remainder beneficiary of the GRAT.

The required minimum term of the GRAT would make a GRAT a riskier planning technique because the transfer tax benefits of GRATs are typically achieved when the grantor outlives the GRAT term. The required maximum term of the GRAT would prevent 99-year GRATs that some taxpayers have created so that the amount includable in the grantor's estate under IRC Section 2036 is very small.

For a trust that is not fully revocable by a deemed owner, the budget proposes to treat the transfer of an asset for consideration between a grantor trust and its deemed owner as a potentially taxable transaction. The seller would recognize gain on any appreciation in the transferred asset. Further, the proposal would treat the payment of income tax on the income of a grantor trust as a gift, occurring on December 31 of the year in which the income tax is paid, unless the trust reimburses the deemed owner during the same year.

Implications. This provision, which has appeared in past legislation, would supersede Revenue Ruling 85-13 (disregarding sales and exchanges between a grantor and his or her grantor trust for income tax purposes) and make sales and the satisfaction of obligations with appreciated property (including in-kind payments of annuity and unitrust amounts, e.g., GRAT annuity payments) result in the recognition of gain.

In addition, the proposal would treat the payment of income tax on the income of a grantor trust as a gift, occurring on December 31 of the year in which the income tax is paid, unless the trust reimburses the deemed owner during the same year.

Implications. This provision is new. Under IRC Section 671, grantors of a grantor trust must include in their income their grantor trust's items of income, deductions and credits; therefore, the tax on the income of the grantor trust is the grantor's obligation and does not constitute a gift from the grantor to the beneficiaries. In Revenue Ruling 2004-64, the IRS confirmed that the grantor's payment of his or her grantor trust's income tax liability was not a gift. This provision would invalidate these authorities. The exception in the provision for reimbursement is a double-edged sword. Assuming the provision would only invalidate Revenue Ruling 2004-64's conclusion on gift tax, a grantor trust's consistent reimbursement to the grantor of the income tax could still cause the grantor trust's assets to be included in the grantor's estate; as such, the ruling, would still require taxpayers to be cautious when planning with GRATs.

The changes to the GRAT rules and the change characterizing the grantor's payment of income tax as a gift, would apply to all trusts created on or after the date of enactment. The gain recognition portion would apply to all transactions between the grantor trust and its deemed owner occurring on or after the date of enactment.

Implications. The grandfathering rule would allow taxpayers to continue to plan with GRATs without having to worry that a subsequent law change will change the intended benefit of GRATs. It would also grandfather all trusts in existence from being subject to gift tax when the grantor pays the tax liability of the grantor trust — thus, creating a grantor trust today and minimally funding it for use in the future should be considered. It also seems that existing sales or exchanges involving a note would be grandfathered but it is unclear whether this new provision would apply when the existing note is settled.

Requiring consistent valuation of promissory notes

Another proposal would require consistency in the valuation of promissory notes. This proposal would require the interest rate and other terms of a promissory notes connected with family loans and/or other transaction (e.g. the length of the note), to be consistently valued for federal estate and gift tax purposes.

Implications. This provision is new. It is designed to eliminate the friction created between the IRC Section 7872 rules (regarding below-market loans) and generally accepted valuation principals. The IRC Section 7872 rules were enacted as the result of the Supreme Court's decision in Dickman v. Commissioner, 466 U.S. 945 (Feb. 22, 1984), holding that the interest-free use of money is a gift. To prevent the application of IRC Section 7872, taxpayers must charge a minimum interest rate (depending on the length of the loan) for loans between certain taxpayers. The interest rate is based on the Applicable Federal Rates (AFRs), which the IRS publishes monthly. These rates are significantly lower than prevailing market rates and are generally used in related-party transactions, which creates the friction. Taxpayers engage in related-party loans and charge the AFR to avoid IRC Section 7872. However, when these notes are transferred or are part of a taxpayer's estate, they are valued based using FMV principals — which would require the valuation of the note to take into consideration prevailing market rates, not the AFR used when the note was executed. This would cause the value of the note to be significantly discounted — a discounting that was not the result of normal market conditions.

Modifying tax administration for trusts and estates

The proposal would expand the definition of executor and move the definition from IRC Section 2203 to IRC Section 7701, "expressly making it applicable for all tax purposes, and [authorizing] such an executor to do anything on behalf of the decedent in connection with the decedent's pre-death tax liabilities or other tax obligations that the decedent could have done if still living." Multiple parties could serve as executor, so the proposal would authorize Treasury to adopt rules to resolve potential conflicts among multiple executors.

Implications. This proposal is a carryover from President Obama's budget proposals. The proposal would make the definition applicable for all tax purposes, not just estate tax purposes. Currently, it is not clear that an executor can handle tax matters that may have arisen before the death of the taxpayer — e.g., income tax audit, final income/gift tax return.

The Administration also proposes to increase the cap to $11.7m on the maximum valuation decrease for qualified real property that may be treated as special use property, noting that this property generally includes real property used in family farms, ranches, timberland, etc.

Implications. This provision was rumored to be in the BBBA but never made it into the Act. This amount is currently $1.230m. IRC Section 2032A allows real property used in a farm or business to be valued for estate tax purposes based on its actual use, rather than on its best use.

The proposal would also extend the duration of the 10-year automatic lien period "to continue during any deferral or installment period for unpaid estate and gift taxes." This extension would apply to 10-year liens currently in effect, as well as to future liens.

Implications. A carryover from President Obama's budget proposals, this proposal would extend the general estate tax lien that applies to all estate tax liabilities under IRC Section 6324 to continue past the normal 10-year period until the deferral period the decedent's estate has elected under IRC Section 6166 expires. This proposal responds to the Tax Court's decision in Estate of Roski v. Commissioner, 128 T.C. 113 (Apr. 12, 2007), in which the court held that the IRS had abused its discretion by requiring all estates electing to pay estate tax in installments under IRC Section 6166 to provide a bond or lien. The court held that Congress intended the IRS to determine, on a case-by-case basis, whether the government's interest is at risk before requiring security from an estate making an election under IRC Section 6166.

Further, the proposal would require certain trusts administered in the United States, whether domestic or foreign, to annually report certain information to the IRS "to facilitate the appropriate analysis of tax data, the development of appropriate tax policies, and the administration of the tax system." This new reporting requirement would apply to any trust with (1) an estimated total value exceeding $300,000 on the last day of the tax year or (2) gross income exceeding $10,000 for the tax year.

Implications. This provision appears in the Sensible Taxation and Equity Promotion Act of 2021 proposed by Senator Chris Van Hollen (D-MD) on March 29, 2021. The reporting would be done on the trust's annual income tax return, or as otherwise provided by Treasury. The trust would have to provide general information, including the name, address, and taxpayer identification number of each trustee and grantor, as well as the general nature and estimated total value of the trust's assets.

Limiting duration of generation-skipping transfer tax exemption

The Administration proposes to limit the generation-skipping transfer (GST) tax exemption to "(a) direct skips and taxable distributions to beneficiaries no more than two generations below the transferor, and to younger generation beneficiaries who were alive at the creation of the trust; and (b) taxable terminations occurring while any person described in (a) is a beneficiary of the trust," although IRC Section 2653 (Taxation of Multiple Skips) would not apply for these purposes.

The proposal would apply on and after the date of enactment to all trusts subject to the GST tax, regardless of the inclusion ratio applicable on the date of enactment.

Implications. This provision is new. For purposes of determining the duration of GST exemption, a trust created before the date of enactment (i.e., a grandfathered trust) would be deemed to have been created on the date of enactment. As a result, trust assets would only be exempted from GST tax during the life of any beneficiary who is no younger than the grandchild of the transferor or a beneficiary who is a member of a younger generation who was alive at the creation of the trust. After this period, the inclusion ratio of the trust would increase to one and the entire trust would no longer be exempt from GST tax.

APPENDIX

Summary of tax proposals affecting high net-worth individuals

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