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It’s been made clear that the democrats don’t support extending the current estate tax rules beyond their expiration date. Instead, the current administration has proposed a number of significant changes that would generally take effect in 2025, aligning with the proposed budget for that year.
One key proposal is about the rules for realization events for gift and death tax transfers. Right now, assets transferred to most irrevocable trusts are removed from the giver’s estate and are not taxed. This is because the control over the assets is transferred to the trust.
Under the proposed changes, however, sales or other transfers between a grantor/beneficiary and a trust would require the recognition of taxable gain or loss to the seller or transferor. Also, tax payments made on behalf of a trust would be treated as gifts, meaning they would be subject to gift tax rules unless the trust reimburses the person who made the payment.
Furthermore, loans from trusts to their grantor or beneficiary, which currently have no tax implications, would be treated as income distributions under the proposed rules. These loans would also be subject to Generation-Skipping Transfer (GST) tax rules, which could lead to GST tax being applied. If the grantor or beneficiary cannot pay the tax, the trust itself might have to.
The proposals also aim to change the Generation-Skipping Transfer (GST) tax rules. One significant change would involve modifying the GST inclusion ratio rules to account for changes in trust assets resulting from most transactions.
Moreover, the proposals seek to limit the allocation of any GST exemption to two generations below the transferor and to taxable terminations that occur while an eligible beneficiary is alive. The goal of this proposal is to make sure that the benefits of the GST exemption don’t last longer than the trust itself, effectively putting a generational limit on the exemption’s use.
Currently, most assets in an individual’s estate get a cost basis adjustment up to their fair market value at the time of the individual’s death. However, the proposed rules would require the owner of an appreciated asset to recognize a capital gain at the time of transfer.
The amount of the gain would be the difference between the asset's fair market value on the date of the gift or the decedent's date of death and the decedent's basis in that asset. This gain would be taxable income to the donor or the decedent's estate, reported on the federal gift or estate tax return.
One of the most significant proposals involves forced recognition events. Under the proposed rules, when an appreciated asset is transferred as a gift during the owner’s life or as part of their estate settlement, a taxable gain would be recognized by the individual or their estate.
Moreover, the proposals would require gain recognition on the unrealized appreciation of assets that haven’t had a recognition event within the last 90 years. This measurement would start on January 1, 1944, meaning the first deemed recognition events would happen after December 31, 2033.
While the proposal applies to both individuals and entities, it includes exceptions for assets like personal property and homes. Additionally, special rules are proposed for family-owned and operated businesses, allowing them to delay a recognition event and spread out any tax due over a period of 15 years.
The proposed overhaul also extends to split-interest trusts, like charitable lead annuity trusts, which transfer their remaining interest to a non-charitable beneficiary after a series of annuity payments to a charitable organization. One of the proposed changes would establish a minimum value, along with minimum and maximum terms, for determining the annuity and remainder interests.
Additionally, the proposal would prohibit the exchange of trust assets without triggering a realization event, further tightening the rules around these complex trust structures.
Under the current gifting rules, individuals can give up to $18,000 annually to an unlimited number of recipients, provided the gifts meet the "present interest" requirement, which means the recipient has immediate and unrestricted use of the gift.
However, a workaround known as the "Crummey power" has allowed beneficiaries to meet the present interest requirement by having a limited right of withdrawal from the trust.
The budget proposal seeks to close this loophole by setting the annual gifting limit at $50,000 per donor, with gifts exceeding this new limit potentially subject to taxation. Additionally, the proposal would eliminate the present interest requirement for gifts, effectively making the Crummey power obsolete.
While the current administration is pushing for a major overhaul of estate tax laws, the opposition party, led by former President Trump and the Republican Party, is advocating for a different approach.
Though details are limited, Trump and the Republican Party have expressed support for making the expiring estate tax provisions of the TCJA permanent. There’s also some support within the party for eliminating the estate tax altogether, with House Republicans recently reintroducing the Death Tax Repeal Act.
Another proposal gaining traction among Republicans is to reduce the maximum estate tax rate from the current 40% to 20%, offering relief to those affected by the tax.
The Road Ahead in 2025 and Beyond
The specific outcome of any changes to the TCJA tax reforms will largely depend on which party controls the White House and Congress after the elections, as well as the level of concern about the federal budget deficit.
Elected officials from both parties may prioritize keeping the TCJA tax cuts for the middle class and small businesses, recognizing their impact on the economy.
However, due to budget pressures, both parties might need to consider ways to raise revenue to "pay" for extending the expiring provisions. These could include raising the corporate tax rate, increasing individual rates
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