{"id":16604,"date":"2023-03-30T12:00:28","date_gmt":"2023-03-30T16:00:28","guid":{"rendered":"https:\/\/actec.matrixdev.net\/?post_type=capital-letter&p=16604"},"modified":"2024-01-07T20:21:53","modified_gmt":"2024-01-08T01:21:53","slug":"selected-income-gst-gift-and-estate-tax-proposals-in-the-greenbookselected-income-gst-gift-and-estate-tax-proposals-in-the-greenbook","status":"publish","type":"capital-letter","link":"https:\/\/actec.matrixdev.net\/capital-letter\/selected-income-gst-gift-and-estate-tax-proposals-in-the-greenbookselected-income-gst-gift-and-estate-tax-proposals-in-the-greenbook\/","title":{"rendered":"Selected Income, GST, Gift, and Estate Tax Proposals in the Greenbook"},"content":{"rendered":"\n

The Fiscal Year 2024 Greenbook includes many income, GST, estate, and gift tax proposals, including recognition of gain on gifts, transfers at death, and sales between a grantor trust and the deemed owner, and limitations on the GST exemption, GRATs and CLATs, the annual gift tax exclusion, and private operating foundations.<\/em><\/strong><\/p>\n\n\n\n

Dear Readers Who Follow Washington Developments:<\/em><\/p>\n\n\n\n

The Treasury Department released its \u201c General Explanations of the Administration\u2019s Fiscal Year 2024 Revenue Proposals<\/strong><\/a>\u201d (popularly called the \u201cGreenbook\u201d) on March 9, 2023. Many of the proposals in the Greenbook are carried over, sometimes with changes, from last year\u2019s Fiscal Year 2023 Greenbook, and many resemble legislative proposals made in 2021 (including in the Fiscal Year 2022 Greenbook) that were not included in the \u201cBuild Back Better Act\u201d (H.R. 5376) passed by the House of Representatives on November 19, 2021.<\/p>\n\n\n\n

With a sharply divided Congress, it is very possible that none<\/em> of the Greenbook proposals will be acted on. Even so, whenever we see legislative proposals articulated like this, it is important to pay attention, because they are constantly evolving and could be pulled from the shelf and enacted, if not this year then in the future when the political climate is different. Such proposals never completely go away. And each time they are refined and updated, we can learn more about what to watch for and how to react.<\/p>\n\n\n\n

Capital Letter Number 59<\/strong><\/a> covered the proposals in the Greenbook affecting gift and estate tax valuation. This Capital Letter will cover the other income tax, GST tax, and estate and gift tax proposals that significantly affect estate planning. (Both Capital Letters are adapted from the \u201cWashington Update,\u201d a Bessemer Trust Insight for Professional Partners<\/strong><\/a> dated March 13, 2023).<\/p>\n\n\n\n

INCOME TAX PROPOSALS<\/strong><\/p>\n\n\n\n

Individual Income Tax Rates, Including Capital Gains<\/strong><\/p>\n\n\n\n

Like the Fiscal Year 2022 and 2023 Greenbooks, the Fiscal Year 2024 Greenbook proposes (at page 77) to accelerate the return of the top marginal individual income tax rate to 39.6 percent (as it was before 2018 and will be again in 2026 under the 2017 Tax Act), effective, somewhat surprisingly, on January 1, 2023. Compared to the Fiscal Year 2022 proposal, however, the current proposal would lower the levels of taxable incomes at which that rate would apply to $450,000 for joint returns, $400,000 for unmarried individuals (other than surviving spouses), $425,000 for heads of households, and $225,000 for married individuals filing separate returns. After 2024, the thresholds would be indexed for inflation using the \u201cChained CPI\u201d (\u201cC-CPI-U\u201d) that was introduced in the 2017 Tax Act. Over the next 10 fiscal years, this proposal is estimated to raise approximately $235 billion.<\/p>\n\n\n\n

Also mirroring the Fiscal Year 2022 and 2023 Greenbooks, the current Greenbook proposes (at page 79) to tax long-term capital gains and qualified dividends at the same rate as ordinary income (that is, 37 percent under current law or 39.6 percent as proposed). This would apply to taxpayers with taxable income over $1 million ($500,000 for married individuals filing separately). It would be effective \u201cfor gains required to be recognized and for dividends received on or after the date of enactment\u201d (an improvement over the puzzling \u201cdate of announcement\u201d in the Fiscal Year 2022 proposal).<\/p>\n\n\n\n

This proposal and the proposed \u201cdeemed realization\u201d of capital gains (discussed below) together are estimated to raise approximately $214 billion over the next 10 fiscal years.<\/p>\n\n\n\n

Minimum Tax on the Wealthiest Taxpayers<\/strong><\/p>\n\n\n\n

This provision (at pages 82-84), which was new in the Fiscal Year 2023 Greenbook, is an adaptation of Senator Wyden\u2019s \u201cTreat Wealth Like Wages\u201d proposal, rolled out to a very lukewarm reception as his \u201cBillionaires Income Tax\u201c on October 27, 2021. The Greenbook version proposes a minimum tax, effective January 1, 2024, of 25 percent of total income (up from 20 percent in the Fiscal Year 2023 Greenbook), generally including unrealized capital gains, for taxpayers with \u201cwealth\u201d (that is, assets minus liabilities) greater than $100 million. Taxpayers could choose to pay the minimum tax liability in equal annual installments over nine years for the first year of minimum tax liability and over five years for subsequent years (perhaps because it is assumed that after the first year a taxpayer will be more prepared for it). The minimum tax payments would be treated as a prepayment to be credited against subsequent taxes on realized gains to avoid taxing the same amount of gain more than once.<\/p>\n\n\n\n

Taxpayers with tradable assets constituting less than 20 percent of their wealth would be treated as \u201cilliquid\u201d and could elect to include the unrealized gain only for tradable assets in determining the annual minimum tax, subject to a \u201cdeferral charge\u201d (not to exceed 10 percent of unrealized gains, but otherwise unquantified) \u201cupon, and to the extent of, the realization of gains on any non-tradable assets.\u201d No estimated payments would be required for the minimum tax. Taxpayers with wealth over the $100 million threshold would have to report annually the total basis and total estimated value of assets in each specified asset class, with alternatives to appraisals available for valuing non-tradable assets.<\/p>\n\n\n\n

This proposal is estimated to raise approximately $437 billion over 10 fiscal years. The constitutionality of either the wealth trigger, or the taxation of unrealized appreciation, or both, might be challenged in court.<\/p>\n\n\n\n

Statutory language for this proposal, with some embellishments, appeared in the \u201cBillionaire Minimum Income Tax Act\u201d (H.R. 8558), introduced on July 28, 2022, by Representative Steve Cohen (D-Tennessee), with 32 cosponsors (all Democrats). Among the embellishments in H.R. 8558 was a provision requiring the \u201cwealth\u201d used to determine the applicability of the tax to any taxpayer to include (1) any asset of a trust treated as owned by the taxpayer under sections 671-679, (2) any asset of any other trust if the asset or the income (in whole or in part) therefrom is \u201cdistributable\u201d to the taxpayer (not including distribution rights that are contingent upon the death of another trust beneficiary), and (3) any gratuitous transfers by the taxpayer within the last five years (other than charitable contributions, transfers to a spouse or former spouse incident to divorce under section 1041, and transfers to a spouse who is also subject to this tax). Under H.R. 8558, the requirement for annual reporting contemplated by the Greenbook would be spelled out in regulations.<\/p>\n\n\n\n

Recognition of Gain on Sales Transactions with Grantor Trusts<\/strong><\/p>\n\n\n\n

Mirroring the \u201cBuild Back Better\u201d bill the House Ways and Means Committee approved in September 2021, the Greenbook (at page 127) proposes that, \u201cfor trusts that are not fully revocable by the deemed owner,\u201d \u201cthe transfer of an asset for consideration between a grantor trust and its deemed owner\u201d would result in the recognition of gain. The proposal uses, without elaboration, the term \u201cdeemed owner\u201d (which sometimes implies that it includes a person other than the grantor under section 678) and also the term \u201cgrantor trust\u201d (which sometimes implies that a trust treated as owned by a person other than the grantor is not included). The proposal would apply to transactions on or after the date of enactment. It would require the recognition of gain both on sales and on transfers in satisfaction of an obligation (such as an annuity or unitrust payment) with appreciated property. But recognition of losses would not be allowed; in a refinement of the Fiscal Year 2023 Greenbook proposal, the current Greenbook proposes an addition to section 267(b) that would disallow recognition of losses in such transactions. The proposal would significantly overlap with the deemed realization proposals for trusts, discussed next.<\/p>\n\n\n\n

This proposal would have the effect of overruling Rev. Rul. 85-13, 1985-1 C.B. 184, although the Greenbook does not mention that. The basic premise of Rev. Rul. 85-13 was that \u201ca transaction cannot be recognized as a sale for federal income tax purposes if the same person is treated as owning the purported consideration both before and after the transaction.\u201d The Greenbook does not explain how the legislation it proposes might prevent deemed owners of trusts from in effect buying assets from themselves and thereby obtaining a new basis, which was one of the issues in Rev. Rul. 85-13 and was the main issue in the rather shaky opinion in Rothstein v. United States<\/em>, 735 F.2d 704 (2d Cir. 1984), which Rev. Rul. 85-13 repudiated. Of course, the need to recognize gain and be taxed on it in order to obtain a new cost basis would typically discourage the use of this technique, except maybe in cases where there were factors like significant offsetting losses.<\/p>\n\n\n\n

Deemed Realization of Capital Gains<\/strong><\/p>\n\n\n\n

In terms almost identical to the Fiscal Year 2022 and 2023 budget proposals, the Greenbook (at pages 78-81) again advocates the \u201cdeemed realization\u201d of capital gains upon transfers by gift and at death.<\/p>\n\n\n\n

Effective Date.<\/strong> The proposal would take effect on January 1, 2024. But it would apply to pre-2024 appreciation; there would be no \u201cfresh start\u201d as, for example, in the 1976 carryover basis legislation.<\/p>\n\n\n\n

Realization Events.<\/strong> Gain would be explicitly realized on transfers by gift or at death, equal to the excess of an asset\u2019s fair market value on the date of the gift or death over the donor\u2019s or decedent\u2019s basis in that asset. The Greenbook does not mention holding periods or distinguish short-term and long-term gain. The Greenbook also does not specifically incorporate the alternate valuation date for transfers at death, although it does state generally that a transfer \u201cwould be valued at the value used for gift or estate tax purposes.\u201d<\/p>\n\n\n\n

Taxpayer, Return, and Deductibility.<\/strong> The Greenbook states that the gain would be reported \u201con the Federal gift or estate tax return or on a separate capital gains return.\u201d Reassuringly, however, the Greenbook confirms that the gain realized at death \u201cwould be taxable income to the decedent\u201d and, consistently with that characterization, explicitly adds that \u201cthe tax imposed on gains deemed realized at death would be deductible on the estate tax return of the decedent\u2019s estate (if any).\u201d That means that, after all exclusions are used, the proposed 39.6 percent capital gains rate and the current 40 percent estate tax rate would produce a combined tax rate on appreciation of 63.76 percent (0.396 + 0.4 \u00d7 (1 – 0.396)).<\/p>\n\n\n\n

Exclusion for Tangible Personal Property.<\/strong> The Greenbook would exclude \u201cgain on all tangible personal property such as household furnishings and personal effects (excluding collectibles).\u201d<\/p>\n\n\n\n

Exclusion for Transfers to Spouses.<\/strong> The Greenbook would exclude \u201ctransfers to a U.S. spouse.\u201d There is no elaboration of the term \u201cU.S. spouse\u201d (for example, citizen or resident), and there are no special provisions targeted to spousal trusts. Transfers to a spouse would carry over the transferor\u2019s basis. Thus, the effect of excluding transfers to spouses apparently would be simply to defer the application of the deemed realization rules until the spouse\u2019s disposition of the asset or the spouse\u2019s death.<\/p>\n\n\n\n

Exclusion for Transfers to Charity.<\/strong> The Greenbook would exclude \u201ctransfers \u2026 to charity,\u201d adding that \u201cthe transfer of appreciated assets to a split-interest trust would be subject to this capital gains tax, with an exclusion from that tax allowed for the charity\u2019s share of the gain based on the charity\u2019s share of the value transferred as determined for gift or estate tax purposes.\u201d Thus, for many purposes, the exclusion would correspond to the allowable gift or estate tax charitable deduction. Like transfers to a spouse, transfers to charity would carry over the transferor\u2019s basis.<\/p>\n\n\n\n

Other Exclusions.<\/strong> The Greenbook proposes a unified exclusion of capital gains for transfers both by gift and at death of $5 million per person (up from $1 million in the Fiscal Year 2022 Greenbook), indexed for inflation and \u201cportable to the decedent\u2019s surviving spouse under the same rules that apply to portability for estate and gift tax purposes.\u201d The Greenbook adds that this would \u201cresult \u2026 in a married couple having an aggregate $10 million exclusion,\u201d but it does not explain exactly how that would be accomplished for lifetime gifts when there has been no \u201cdecedent\u201d or \u201csurviving spouse.\u201d The Greenbook does not address whether the use of the exclusion for lifetime gifts is mandatory or elective. But it adds, somewhat quixotically and without further elaboration, that the $5 million exclusion \u201cwould apply only to unrealized appreciation on gifts to the extent that the donor\u2019s cumulative total of lifetime gifts exceeds the basic exclusion amount in effect at the time of the gift.\u201d Thus, in effect, a lifetime gift must actually generate a gift tax liability for the donor to use this $5 million exclusion of gain during life. So the first $12 million or so of gifts would trigger recognition of gain, and after that gifts with $5 million of appreciation would escape deemed realization, and after that gifts would trigger gain again. This could significantly influence the selection of assets to use for lifetime gifts.<\/p>\n\n\n\n

But in an apparent reversal of the Fiscal Year 2022 Greenbook, the two recent Greenbooks state that \u201cthe recipient\u2019s basis in property, whether received by gift or by reason of the decedent\u2019s death, would be the property\u2019s fair market value at the time of the gift or the decedent\u2019s death\u201d (except, presumably, for excluded transfers to spouses and to charity discussed above). The Fiscal Year 2022 Greenbook had included the caveat that \u201cthe donee\u2019s basis in property received by gift during the donor\u2019s life would be the donor\u2019s basis in that property at the time of the gift to the extent the unrealized gain on that property counted against the donor\u2019s $1 million exclusion from recognition.\u201d Thus, the recent Greenbooks would increase that proposed $1 million exclusion to $5 million and at the same time allow a stepped-up basis even if the gain is excluded. Although a bit surprising, that would be a significant simplification.<\/p>\n\n\n\n

In addition, the Greenbook confirms that the exclusion of $250,000 per person of gain from the sale or exchange of a taxpayer\u2019s principal residence under section 121 would apply to the gain realized under this proposal with respect to all residences, and it adds that that exclusion would be made \u201cportable to the decedent\u2019s surviving spouse.\u201d In this case the application of the portability model to lifetime gifts may be less of an issue because section 121(b)(2) itself doubles the exclusion to $500,000 for joint returns involving jointly used property.<\/p>\n\n\n\n

The Greenbook also confirms that the exclusion under current law for capital gain on certain small business stock under section 1202 would apply.<\/p>\n\n\n\n

Netting of Gains and Losses.<\/strong> For transfers at death, capital losses and carry-forwards would be allowed as offsets against capital gains and up to $3,000 of ordinary income, mirroring the current income tax rules for lifetime realization events in sections 1211 and 1212. There is no mention of relaxing the rules of section 267 prohibiting the deduction of losses from sales or exchanges between related persons, but it seems almost certain that those rules would be relaxed in any provision for taking losses into account at death, where transfers to related persons are the norm.<\/p>\n\n\n\n

Valuation.<\/strong> As noted above, the Greenbook contemplates that a transfer generally \u201cwould be valued at the value used for gift or estate tax purposes.\u201d It adds that \u201ca transferred partial interest generally would be valued at its proportional share of the fair market value of the entire property.\u201d In other words, no entity-level discounts. But, in an elaboration of the word \u201cgenerally,\u201d which was new in the Fiscal Year 2023 Greenbook, the Fiscal Year 2023 and 2024 Greenbooks helpfully add that \u201cthis rule would not apply to an interest in a trade or business to the extent its assets are actively used in the conduct of that trade or business.\u201d For more commentary on the treatment of family-owned businesses, see the discussion of the proposed rules for valuation of fractional interests and interests in entities in Capital Letter Number 59<\/strong><\/a>.<\/p>\n\n\n\n

Special Rules for Trusts and Entities.<\/strong> The Greenbook provides that transfers into, and distributions in kind from, a trust would be recognition events, unless the trust is a grantor trust deemed wholly owned and revocable by what the Greenbook calls \u201cthe donor.\u201d Again there is no exclusion or exemption for pre-enactment gain, and indeed the Greenbook explicitly states that the proposal would apply to \u201ccertain property owned by trusts \u2026 on January 1, 2024.\u201d In other words, this proposed recognition treatment would apply to distributions of appreciated assets to both current and successive or remainder beneficiaries of preexisting trusts, including, for example, a pre-2024 GRAT. With regard to revocable trusts, the deemed owner would recognize gain on the unrealized appreciation in any asset distributed (unless in discharge of the deemed owner\u2019s obligation) to anyone other than the deemed owner or the deemed owner\u2019s \u201cU.S. spouse\u201d (again undefined), and on the unrealized appreciation in all the assets in the trust when the deemed owner dies or the trust otherwise becomes irrevocable.<\/p>\n\n\n\n

The Fiscal Year 2022 Greenbook, surprisingly, provided that the rules about transfers into and distributions in kind from a trust would also apply to a \u201cpartnership\u201d or \u201cother non-corporate entity,\u201d without further explanation. The subsequent Greenbooks clarify that this extension to such entities applies \u201cif the transfers have the effect of a gift to the transferee.\u201d<\/p>\n\n\n\n

The Greenbook also proposes, in effect, a 90-year mark-to-market rule, stating:<\/p>\n\n\n\n

\u201cGain on unrealized appreciation also would be recognized by a trust, partnership, or other non-corporate entity that is the owner of property if that property has not been the subject of a recognition event within the prior 90 years. This provision would apply to property held on or after January 1, 1942, that is not subject to a recognition event since December 31, 1941, so that the first recognition event would be deemed to occur on December 31, 2032.\u201d<\/p>\n\n\n\n

Again assets of partnerships and other entities are included, in this case without a gift-equivalent requirement or other explanation. Because December 31, 2032, is 91, not 90, years from December 31, 1941, it appears that the Greenbook contemplates recognition under this proposal only at the end of each year, but the Greenbook does not clarify that. And, because it does not depend on any arguable recognition \u201cevent\u201d like a gift, death, or other transfer, this 90-year mark-to-market rule is probably the feature of this proposal that would most likely attract a constitutional challenge.<\/p>\n\n\n\n

Deferral of Tax.<\/strong> The Greenbook also provides that \u201ctaxpayers could elect not to recognize unrealized appreciation of certain family-owned and -operated businesses until the interest in the business is sold or the business ceases to be family-owned and -operated.\u201d Deferral could increase the amount of tax if there is more appreciation, but it could also prevent the payment of tax to the extent the value of the business declines (which sometimes happens after the death of a key owner). That approach would apparently also tax the realization event at whatever the tax rates happen to be at the time, which might sometimes be a vexing consideration in the executor\u2019s decision to make this election.<\/p>\n\n\n\n

If this election is made, would it still be true, as the Greenbook states in the context of exclusions immediately before its discussion of deferral, that \u201cthe recipient\u2019s basis in property, whether received by gift or by reason of the decedent\u2019s death, would be the property\u2019s fair market value at the time of the gift or the decedent\u2019s death\u201d? Probably not, because mere deferral of deemed realization (regardless of the amount of gain deferred) is much different from the total escape from realization provided by the limited exclusion. Thus, the loss of a stepped-up basis at intervening deaths could make this ultimate income tax liability much more severe than under current law.<\/p>\n\n\n\n

And, of course, like the valuation proposals discussed in Capital Letter Number 59<\/strong><\/a>, the statutory language implementing this Greenbook proposal should be expected to include definitions of \u201cbusiness,\u201d \u201cfamily-owned,\u201d and \u201cfamily-operated\u201d and possibly rules for the identification of assets that should be excluded from the deferral because they are not used in the business, and such definitions and rules might also create or aggravate challenges over a long-term deferral. The IRS would also be authorized to require reasonably necessary security at any time from any person and in any form acceptable to the IRS, which could be another complication for the family business, for example in raising capital, over a long-term deferral.<\/p>\n\n\n\n

In addition, the Greenbook would allow \u201ca 15-year fixed-rate payment plan for the tax on appreciated assets transferred at death, other than liquid assets such as publicly traded financial assets and other than businesses for which the deferral election is made.\u201d Details about start dates and interest rates are not provided, but the proposal appears much broader and more robust than, for example, section 6166 with its multiple qualification tests.<\/p>\n\n\n\n

Administrative Provisions.<\/strong> The Greenbook envisions (but without details) a number of other legislative features, covering topics such as a deduction for the full cost of related appraisals, the imposition of liens, the waiver of penalties for underpayment of estimated tax attributable to deemed realization of gains at death (which, of course, would not necessarily have been foreseeable), a right of recovery of the tax on unrealized gains, rules to determine who selects the return to be filed, consistency in valuation for transfer and income tax purposes, and coordination of the changes to reflect that the recipient would have a basis in the property equal to the value on which the capital gains tax is computed.<\/p>\n\n\n\n

Regulations.<\/strong> Treasury would be granted authority to issue any regulations necessary or appropriate to implement the proposal, including reporting requirements that could permit reporting on the decedent\u2019s final income tax return, which would be especially useful if an estate tax return is not otherwise required to be filed. In a tacit acknowledgment of the harshness of enacting such a proposal without a \u201cfresh start\u201d for basis as in 1976, the Greenbook explicitly contemplates that the regulations will include \u201crules and safe harbors for determining the basis of assets in cases where complete records are unavailable.\u201d<\/p>\n\n\n\n

Revenue Estimate.<\/strong> Taxing capital gains at the same rate as ordinary income for taxpayers with taxable income over $1 million (discussed above) and this proposed \u201cdeemed realization\u201d of capital gains together are estimated to raise approximately $214 billion over the next 10 fiscal years.<\/p>\n\n\n\n

DEEMED OWNER\u2019S PAYMENT OF TRUST INCOME TAX AS A GIFT<\/strong><\/p>\n\n\n\n

The Greenbook (at page 127) proposes that payment by the \u201cdeemed owner\u201d of income tax on the income of a \u201cgrantor trust\u201d (other than a trust that is fully revocable by the deemed owner, as the Fiscal Year 2024 Greenbook clarifies) would be a gift by the deemed owner \u201cunless the deemed owner is reimbursed by the trust during that same year\u201d in which the tax is paid. Again, the proposal uses the potentially clashing terms \u201cdeemed owner\u201d and \u201cgrantor trust.\u201d<\/p>\n\n\n\n

The Greenbook states that the gift would generally occur \u201con December 31 of the year in which the income tax is paid.\u201d Acknowledging the need for some exceptions to that rule, the Greenbook adds \u201cif earlier, immediately before the owner\u2019s death, or on the owner\u2019s renunciation of any reimbursement right for that year.\u201d But even with that addition, the Greenbook does not specifically provide for cases where the reimbursement is made only in the trustee\u2019s discretion and not as the deemed owner\u2019s \u201cright,\u201d or where the \u201creimbursement right\u201d terminates other than by the owner\u2019s renunciation, or when grantor trust (or \u201cdeemed owned\u201d) status itself terminates other than by the owner\u2019s death. Likewise, the Greenbook does not address how to determine the year in which the deemed owner pays the income tax on the trust\u2019s income when some of the deemed owner\u2019s income tax liability is paid by quarterly estimated payments, three of which have been made in the year before the income tax return is filed, or by overpayments applied from the previous year\u2019s return. It is almost certain, however, that all such payments would be treated as made in the year the return is filed and the tax is due, because otherwise the notion of being \u201creimbursed by the trust during that same year\u201d would make no sense.<\/p>\n\n\n\n

And of course the annual reimbursement of such taxes pursuant to either a requirement or an exercise of discretion pursuant to an understanding or prearrangement would create a risk of including the value of the trust assets in the grantor\u2019s gross estate under section 2036 as applied in Rev. Rul. 2004-64, 2004-2 C.B. 7.<\/p>\n\n\n\n

The Greenbook states that \u201cthe amount of the gift cannot be reduced by a marital or charitable deduction or by the exclusion for present interest gifts or gifts made for the donee\u2019s tuition or medical care,\u201d presumably meaning that the deemed owner\u2019s payment of income tax on a trust\u2019s income would be a gift even if the trust\u2019s assets or income are or could be used to make distributions that would not be taxable gifts if made directly by the deemed owner. But the Greenbook clarifies that the gift will be an adjusted taxable gift for estate tax purposes.<\/p>\n\n\n\n

This proposal would apply to all trusts created on or after the date of enactment (which, if the proposal gains any traction, could provide an incentive to create and fund grantor trusts before the date of enactment).<\/p>\n\n\n\n

LIMITATIONS ON GST EXEMPTION<\/strong><\/p>\n\n\n\n

Like the Fiscal Year 2023 Greenbook, the Fiscal Year 2024 Greenbook (at page 121) muses that \u201cat the time of the enactment of the GST provisions, the laws of most States included a common law Rule Against Perpetuities (RAP) or some statutory version of it requiring that every trust terminate no later than 21 years after the death of a person who was alive at the time the trust was created.\u201d It\u2019s easy to see where that is headed!<\/p>\n\n\n\n

Limited Duration of GST Exemption<\/strong><\/p>\n\n\n\n

The Greenbook (at pages 121-122) proposes to<\/p>\n\n\n\n

\u201cmake the GST exemption applicable only 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.\u201d<\/p>\n\n\n\n

Therefore, trusts would not continue to be exempt, for example, throughout the entire applicable rule against perpetuities period, or for the full life of the trust if shorter (or if there is no rule against perpetuities in the applicable jurisdiction). Trusts would be exempt only for the life of any first- or second-generation beneficiary or any younger generation beneficiary who was alive at the creation of the trust. Unlike the typical rule against perpetuities, all grandchildren would be included as measuring lives, even if they were not \u201clives in being\u201d at the creation of the trust, but, on the other hand, no 21-year period would be added.<\/p>\n\n\n\n

The Greenbook also provides that the \u201creset\u201d rule of section 2653(a) would not apply, apparently meaning that subsequent distributions to members of the then oldest generation would in effect be subject to GST tax twice in the same generation (which is surprising). But it states that the special rule in section 2653(b)(2) for \u201cpour-over trusts\u201d created from a trust (whether under the trust instrument or under a decanting authority) would continue to apply, with such pour-over trusts deemed to have the same date of creation as the initial trust for purposes of determining the duration of the GST exemption.<\/p>\n\n\n\n

This provision limiting the duration of the allocation of GST exemption would apply retroactively to existing trusts, but for purposes of determining the duration of the GST exemption \u201ca pre-enactment trust would be deemed to have been created on the date of enactment and \u2026 the grantor is deemed to be the transferor and in the generation immediately above the oldest generation of trust beneficiaries in existence on the date of enactment.\u201d For example, if a trust had been created 30 years ago and the grantor and all the grantor\u2019s children had died before the date of enactment, then<\/p>\n\n\n\n