Individual, Estate and Gift Taxes under the 2024 Federal Budget

The Biden administration has released its budget proposal for fiscal year 2024. The proposal aims to decrease the federal deficit by roughly $3 trillion within the next decade. To achieve this, taxes will be raised on high-net-worth individuals and large corporations.

The proposed budget entails a 7% increase in the U.S. corporate income tax rate, from 21% to 28%. The ordinary tax rate for top individuals will also increase from 37% to 39.6%. Changes in international tax rules will be implemented, which will increase the tax rate on foreign earnings of U.S. multinational corporations. Furthermore, the corporate stock repurchase excise tax will move up from 1% to 4%, which was part of the Inflation Reduction Act of 2022.

The White House has also released the "Green Book," or General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposal. It provides an in-depth analysis and detailed estimates from the Treasury Department for the administration’s revenue proposals.

High-net-worth individuals continue to be the focus of many of the administration’s proposals in its fiscal year 2024 budget. The proposals, many of which look similar to prior budget proposals, encompass raising individual tax rates, raising capital gain and qualified dividend rates, taxing exchanges between grantors and grantor trusts, imposing restrictions on grantor retained annuity trusts and taxing dispositions of appreciated property at death.

A summary of the income and transfer tax proposed changes most likely to be of interest to high-net-worth individuals follows.

Net Investment Income Tax (NIIT)

Not seen in prior budgets, the administration proposes to expand the net investment income tax (NIIT) base to ensure that all pass-through business income of high-income taxpayers is subject to either the NIIT or Self-Employment Contributions Act (SECA) tax. Under the proposal, a taxpayer would determine “potential NIIT income” by combining income in trade or businesses in which the taxpayer materially participates or that is otherwise not subject to NIIT under current law. The additional income that would be subject to the NIIT would be a specified percentage of potential NIIT income. The specified percentage would start at zero and increase linearly to 100 as adjusted gross income rose from $400,000 to $500,000 ($200,000 to $250,000 for married taxpayers filing separately). These threshold amounts would not be indexed for inflation.

The administration also proposes to increase the NIIT rate and the additional Medicare tax rate by 1.2 percentage points for taxpayers with more than $400,000 of earnings, which would bring the total tax rate from 3.8% to 5%. This threshold would be indexed for inflation.

Both proposals would be effective for taxable years beginning after December 31, 2022.

Individual Income Tax Rate

The administration proposes increasing the top marginal individual income tax rate from 37% to 39.6%. For taxable year 2023, the rate would apply to taxable income over $450,000 for married individuals filing jointly ($225,000 for married individuals filing separately), $425,000 for head of household filers and $400,000 for single filers.

The proposal would be effective for taxable years beginning after December 31, 2022.

The proposal to increase the top marginal individual income rate merely accelerates the increase of the top individual tax rate to 39.6% that is currently scheduled to occur beginning in 2026, which is after most of the 2017 Tax Cuts and Jobs Act (TCJA) provisions are set to expire. However, this proposal also would lower the taxable income bracket subject to the top marginal income tax rate. As a result, the proposal would impose the top marginal tax rate on filers currently below the existing top marginal income tax rate of 37%. Thus, in 2023 the top marginal tax rate is 37% for joint filers with more than $693,750 of taxable income ($578,125 for single filers and heads of household, $346,875 for married filing separately). By comparison, the proposed 39.6% tax rate is proposed to apply to taxable income over $450,000 for joint filers.

Minimum Tax Liability

The administration also proposes a minimum tax of 25% on taxable income, inclusive of unrealized capital gains, for taxpayers with a net worth in excess of $100 million. Payments of the minimum tax would be treated as a prepayment available to be credited against taxes on future realized capital gains. The minimum tax liability in subsequent years would equal 25% of (1) the taxpayer’s taxable income and unrealized gains reduced by (2) the taxpayer’s unrefunded, uncredited prepayments and regular tax. The tax due for the first year could be paid in nine equal annual installments. For subsequent years, the minimum tax could be paid in five equal annual installments.

The proposal also provides guidelines and limitations on how uncredited prepayments would be applied against future realized capital gains, in addition to providing a cap whereby a taxpayer would be fully phased into the minimum tax liability. As a result, the minimum tax would be fully phased in for all taxpayers with wealth greater than $200 million.

Notably, the proposal does not require annual valuations of non-tradeable assets. Rather, non-tradeable assets would be valued using the greater of the original or adjusted cost basis, the last valuation event from investment, borrowing, or financial statement purposes, or other methods approved by the Secretary of the Treasury, increased annually by the sum of the five-year Treasury rate plus two percentage points. Taxpayers deemed to be illiquid because tradeable assets are less than 20% of their wealth may elect to include only unrealized gain in tradeable assets in the calculation of their minimum tax liability. However, the eventual realization of gains on such non-tradeable assets would be subject to a deferral charge not to exceed 10% of unrealized gains.

Estimated tax payments would not be required for the minimum tax liability.

For unmarried taxpayers, net uncredited prepayments in excess of any tax liability from gains at death would be refunded to the estate and includable in the decedent’s gross estate for federal estate tax purposes. For married taxpayers, net uncredited prepayments remaining at death would be transferred to the surviving spouse.

The proposal would be effective for taxable years beginning after December 31, 2023.

Capital Gain and Qualified Dividend Income

Long-term capital gains and qualified dividend income of taxpayers with taxable income over $1 million would be taxed at ordinary income tax rates to the extent the taxpayer’s income exceeds $1 million ($500,000 for married individuals filing separately). The threshold would be indexed for inflation after 2024.

The proposal would be effective for gain required to be recognized and for dividends received on or after the date of enactment.

If the proposal for raising the ordinary income tax rate to 39.6 % becomes law, then the maximum tax rate on capital gains would effectively be 44.6% (39.6% plus NIIT rate of 5%).

Transfers of Appreciated Property

The administration proposes to tax unrealized capital gains on transferred appreciated property upon the occurrence of certain realization events, which would include:

• Transfers of appreciated property by gift
• Transfers of appreciated property on death
• Transfers of property to, or distributions of property from, trusts (other than wholly revocable trusts)
• Distributions of property from a revocable grantor trust to any person other than the deemed owner or U.S. spouse of the deemed owner (other than distributions made in discharge of an obligation of the deemed owner)
• Terminations of a grantor’s ability to revoke a trust – at death or during life
• Transfers of property to, and distributions of property from, partnerships or other non-corporate entities if the transfer is a gift to the transferee
• Recognition of gain on the unrealized appreciation of property held by trusts, partnerships or other non-corporate entities, if the property has not had a recognition event within the prior 90 years. The first recognition event under this 90-year rule would occur December 31, 2032, for property not subject to a recognition event since December 31, 1941.

The proposal allows some exclusions. Transfers by a donor or decedent to a U.S. spouse would not be a taxable event, and the surviving spouse would receive the decedent’s carryover basis. The surviving spouse would recognize the gain upon disposition or death. Similarly, transfers to charity would not generate a taxable capital gain. Transfers to a split interest trust, such as a charitable remainder trust, would generate a gain with an exclusion allowed for the charity’s share of the gain. Transfers of tangible personal property, such as household furnishings and personal effects (excluding collectibles), are

.Once a donor has exhausted his or her lifetime gift exemption, the proposal would allow a $5 million per donor exclusion from recognition of additional unrealized capital gain on property transferred by gift or held at death. Any unused exemption by a deceased spouse would be portable to the surviving spouse, effectively making the exclusion $10 million per couple. This additional exclusion amount would be indexed for inflation after 2023. The transferee’s basis in the property shielded by this exemption would be the fair market value of the property at the time of the gift or the decedent’s death.

Payment of the tax on the appreciation of certain family-owned and -operated businesses may be deferred until the business is sold or ceases to be family-owned and -operated. The capital gains tax on appreciated property transferred at death would be eligible for a 15-year fixed rate payment plan. However, publicly traded financial assets will not be eligible for the payment plan. Furthermore, family businesses electing the deferral will not be eligible for the payment plan.

The proposal generally would be effective for transfers by gift, and on property owned at death by decedents dying after December 31, 2023, and on property owned by trusts, partnerships and other non-corporate entities on January 1, 2024.

Contributions of appreciated property to split-interest trusts, such as charitable remainder trusts, will no longer have the favorable treatment afforded under current law – likely making that planning strategy less attractive as a deferral planning technique. Transfers to S corporations and C corporations do not appear to generate gain, assuming those transfers qualify for the deferral provisions of Section 351.

Notably, this proposal does not eliminate the $500,000 exclusion currently available to joint filers ($250,000 for unmarried filers) upon the sale of their principal residence, nor does the proposal eliminate the current exclusion on the sale of qualified small business stock.

This proposal radically alters the rules for recognition of income when it comes to capital assets. Under current law, there generally must be a sale or exchange of property to generate a capital gain. Because the proposal would “deem” a sale when in fact there was no sale, the taxpayer will not necessarily have the cash to pay the capital gains tax. Thus, taxpayers would need to exercise the utmost care to avoid the liquidity issues created by a “deemed” sale.

Defined Value Formula Clauses

Defined value formula clauses are generally used to avoid triggering gift tax liability, for example, by limiting the gift to the amount of property equal to the donor’s remaining gift tax exclusion amount. The formula clause often determines the gift value by reference to the results of IRS enforcement activities. The administration proposes that a defined value formula clause be based on variables that do not require IRS involvement. If a formula clause references IRS involvement to determine the value of the gift (or bequest), then the gift (or bequest) will be deemed to be the value as reported on the corresponding gift or estate tax return. However, a formula clause would be effective if the value is determinable by something identifiable, other than activity of the IRS.

The proposal would apply to transfers by gift or on death occurring after December 31, 2023.

Revision of Gift Tax Annual Exclusion

The proposal would eliminate the present interest requirement for gifts that qualify for the gift tax annual exclusion. Instead, the proposal would define a new category of transfers and would impose an annual limit of $50,000 per donor, indexed for inflation after 2024, on the donor’s transfers of property within this new category that would qualify for the gift tax annual exclusion. Thus, a donor’s transfers in the new category in a single year in excess of the total amount of $50,000 would be taxable, even if the total gifts to each individual donee did not exceed $17,000.

The new category would include transfers in trust (other than trusts designed to qualify for the generation-skipping tax annual exclusion), transfers of interest in passthrough entities, transfers of interests subject to a prohibition on sale, partial interests in property, and other transfers of property that, without regard to withdrawal, put, or other such rights in the donee, cannot immediately be liquidated by the donee. The proposal would be effective for gifts made after December 31, 2023.

Grantor Trusts

Currently, sales between a grantor and his or her intentionally defective grantor trust are nontaxable events. The proposal would recognize such sales and require the seller to recognize gain on the sale of appreciated assets. Taxable transfers also would include the satisfaction of an obligation (i.e., annuity or unitrust payments) with appreciated property. The provision would apply to all transactions between a grantor trust and its deemed owner occurring on or after the date of enactment.

The proposal also would treat the payment of a grantor trust’s income taxes by the deemed owner as a taxable gift occurring on December 31 of the year in which the tax is paid, except to the extent the deemed owner is reimbursed by the trust during that same year. The provision would apply to all trusts created on or after the date of enactment.

Insight: This proposal would overturn the IRS’s prior ruling in Rev. Rul. 85-13, which disregarded transactions between a grantor and his or her grantor trust for income tax purposes.

Grantor Retained Annuity Trusts (GRATs)

Grantor retained annuity trusts (GRATs) currently do not have term restrictions or remainder interest restrictions. The proposal, however, would require a minimum term of 10 years and a maximum term equal to the annuitant’s life expectancy plus 10 years for all GRATs. In addition, a GRAT’s remainder interest would be required to have a minimum value (for gift tax purposes) equal to the greater of (1) 25% of the value of the assets transferred to the GRAT or (2) $500,000 (but not more than the value of the assets transferred). The GRAT annuity may not decrease during the GRAT’s term. Further, the grantor would not be allowed to engage in tax-free exchanges of assets held in the GRAT.

The provisions would apply to all trusts created on or after the date of enactment.

Insights: This provision would effectively eliminate short-term GRATs that are commonly used in a rolling GRAT strategy to reduce the risk of a grantor dying during the GRAT term (and thereby result in the inclusion of the GRAT’s assets in the grantor’s estate). This provision also would prohibit the use of zeroed-out GRATs.

Generation-Skipping Transfer (GST) Tax Exemption

The administration proposes to limit the benefit of the generation-skipping transfer (GST) tax exemption to certain generations. GST tax exemption would apply only to direct skips and taxable distributions to beneficiaries who are no more than two generations below the donor, and to younger-generation beneficiaries who were alive when the trust was created. Also, GST tax exemption would apply only to taxable terminations that occur while any of the aforementioned persons are beneficiaries of the trust.

These proposals would apply on and after the date of enactment to all trusts subject to the GST tax, regardless of the trust’s inclusion ratio. For purposes of determining beneficiaries who were alive when the trust was created, trusts created prior to the date of enactment would be deemed to have been created on the date of enactment. Further, decanted trusts and pour-over trusts would be deemed to have been created on the same date of creation as the initial trust.

Insight: This proposal eliminates the ability to shield trust assets from GST tax in perpetuity, dramatically reducing the allure of dynasty trusts as a tax-saving tool.

Intrafamily Loans

Generally, an intrafamily note carries an interest rate equal to the applicable federal rate (AFR), which has been historically low, to ensure the loan is not treated as a below-market loan or a gift. After the note holder’s death, the valuation of the note for estate tax purposes often includes a discount because the note’s interest rate is well below the market rate. The administration proposes to remedy this inconsistency in valuation by limiting the discount rate to the greater of the note’s actual interest rate or the AFR for the remaining term of the note on the note holder’s date of death. The note would be treated as a short-term note or valued as a demand loan if there is a reasonable likelihood that the note will be satisfied sooner than the specified payment date. The proposal would apply to valuations as of a valuation date on or after the date of enactment.

This proposal would seemingly align the valuation of notes for both income and estate tax purposes.

Valuation and Intrafamily Transfers

Taxpayers regularly transfer marketable securities and other liquid assets to partnerships or other entities, make intrafamily transfers of interests in those entities and then claim entity-level discounts in valuing the gifts. Similarly, intrafamily transfers of partial interests in other hard-to-value assets such as real estate, art or intangibles also occur, allowing all family co-owners to claim fractional interest discounts. The proposal would minimize or eliminate valuation discounts for lack of marketability and lack of control for intrafamily transfers of partial interests in property in which the family collectively has an interest of at least 25% of the whole.

The value of the partial interest transferred would be the interest’s pro-rata share of the collective fair market value of all interest in that property held by the transferor and the transferor’s family members, with that collective fair market value being determined as if held by a sole individual.

The proposal would apply to valuations as of a valuation date on or after the date of enactment.

Other Proposals

The following may also impact high-net-worth taxpayers:

• The special use valuation limit for estate tax purposes for qualified real property would increase to $13 million.
• Trusts would have to report estimated value of trust assets and other information on an annual basis.
• A trust’s exemption from generation-skipping tax would be impacted when the trust engages in transactions with other trusts, such as a sale or decanting.
• A charitable lead annuity trust would be required to fix the annuity paid to charity as a level fixed amount over the term of the charitable lead annuity trust. The remainder interest in a charitable lead annuity trust would have to be at least 10%.
• Loans from a trust to a trust beneficiary would be treated as a distribution.
• These loans can impact generation-skipping tax, especially if a loan is made to the grantor.

Incorporate Chapters 2 and 2a in Centralized Partnership Audit Regime Proceedings

The centralized partnership audit regime currently applies to Chapter 1 income tax matters but excludes self-employment and net investment income taxes under Chapters 2 and 2A. As a result of the current rules, audits of partnerships can be cumbersome and less efficient than intended when income, self-employment and net investment income tax matters are applicable. Additionally, the disconnect between these taxes places a significant burden on partners who must separately address self-employment and net investment income tax consequences resulting from changes to partnership-level income items.

To create greater administrative efficiencies and ease burdens on affected partners, the administration’s proposal would modify the centralized partnership audit regime to include items affecting a partner’s self-employment and net investment income tax liabilities and would apply the sum of the highest rates of tax in Section 1401(b)(1) and (b)(2) of the Internal Revenue Code in effect for the reviewed year to these items.

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

Exemption From the Corporate Income Tax for Fossil Fuel Publicly Traded Partnerships

Publicly traded partnerships are generally subject to the corporate income tax. Partnerships that derive at least 90% of their gross income from depletable natural resources, real estate or commodities are exempt from the corporate income tax. Instead, they are taxed as partnerships. They pass through all income, gains, losses, deductions and credits to their partners, with the partners then being liable for income tax (or benefitting from the losses) on their distributive shares.

The administration’s proposal would repeal the exemption from the corporate income tax for publicly traded partnerships with qualifying income and gains from activities relating to fossil fuels.

The proposal would be effective for taxable years beginning after December 31, 2028.

The administrations proposed budget plans are defined in these additional articles:

1. Corporate and Business Tax Provisions under the 2024 Federal Budget
2. Partnership Tax Provisions under the 2024 Federal Budget
3. International Tax Proposals under the 2024 Federal Budget

For more information contact Robert Ingrasci or our tax team.