Estate Planning Considerations for the New “Green Book” Tax Proposals

July 1, 2021

On May 28, 2021, the Biden Administration released its “Green Book,” which summarizes the Administration’s tax proposals. While the Green Book is not proposed legislation, it highlights the Administration’s focus on taxing high net worth individuals. 

Contrary to expectations, the Green Book does not propose a reduction in the federal gift and estate tax exemptions, nor does it increase federal gift and estate tax rates. Instead, the estate related Green Book proposals, highlighted below, would change the foundational underpinnings of many estate planning strategies by significantly reworking capital gain taxation rules. Though it is uncertain whether the proposals in the Green Book will be enacted, the proposed effective date for many of the proposals is January 1, 2022, resulting in a planning opportunity now for taxpayers who would be affected by the potential changes.

The following are several proposed changes outlined in the Green Book:

  • Treat Gifts and Bequests of Appreciated Property as Realization Events for Capital Gain: Under current law, lifetime gifts and transfers of assets at death do not trigger gain. A donee of a gift receives a “carryover” income tax basis in the asset (deferring gain recognition until a later taxable transfer), while appreciated inherited assets receive a “stepped-up” basis to fair market value as of the decedent’s death (eliminating capital gains tax on any appreciation). 

    Under the proposed legislation, gifts and bequests of appreciated assets will trigger an immediate recognition of taxable gain at the time of the transfer.
  • Realization on In-Kind Transfers to or from Trusts and Certain Other Entities: In-kind transfers of property to or from trusts and certain transfers to and from other pass-through entities would trigger recognition of gain. Gain on revocable trust assets would also be recognized if the trust becomes irrevocable or at the donor’s death.
  • Capital Gain Recognition of Dynasty Trusts: A dynasty trust would recognize gain on unrealized appreciation if that property has not been subject to a recognition event within the prior 90 years. The 90-year period would begin on Jan. 1, 1940, making Dec. 31, 2030, the first possible date of a recognition event for a trust.
  • No Valuation Discounts When Determining Gain: A gift or bequest of a partial interest would be valued at its proportional share of the fair market value of the entire property, i.e., no valuation discounts for transfers of partial interests.

In light of these proposals, it is advisable to review your estate planning before the end of the year. Consider some of the following planning opportunities that could mitigate the impact of these changes:

  • Taxpayers should maximize the use of available exemptions, especially the generation-skipping transfer tax exemption for gifts into dynasty trusts. 
  • Planning with irrevocable grantor trusts should be completed in 2021 to take advantage of any possible benefits that may be provided for trusts created before the effective date of new legislation.
  • Individuals who own closely held business interests or real estate investments should consider transferring their interests before the end of the year while valuation discounts are still available.
  • Gifting cash or assets with a high tax basis is recommended to minimize the exposure to recognition of capital gains. 

There are many factors to consider when reviewing your estate planning needs including the nature and type of your assets and your estate planning goals. Please reach out to the Herrick Private Clients Department to evaluate how these proposed changes may affect your assets and to discuss planning opportunities.  

R. Andrew Shore at +1 212 592 1569 or [email protected]

© 2021 Herrick, Feinstein LLP. This alert is provided by Herrick, Feinstein LLP to keep its clients and other interested parties informed of current legal developments that may affect or otherwise be of interest to them. The information is not intended as legal advice or legal opinion and should not be construed as such.