Administration budgetary proposals would affect trusts, estates, and gifts
On March 28, 2022, President Joe Biden released his proposed federal budget. For fiscal 2023, which included proposed changes to the rules for taxing certain individuals, estates, and trusts, as well as broadening the circumstances under which capital gains become taxable.
Treat gifts or bequests of appreciated property as realization events: This provision would cause capital gain to be realized at the time of the transfer for appreciated property transferred by gift or bequest. For transfers at death, a maximum of $3,000 in capital losses and carryforwards could be claimed against ordinary income on the decedentfs 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 the 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 revocable by the donor; and
- To and by a partnership or other noncorporate entity, if the transfers are effectively a gift to the transferee.
Generally, and with certain exceptions, 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 value of the asset. Unrealized appreciation in the value of the asset would be realized at the deemed owner’s death or any other time when the trust becomes irrevocable.
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; and
- 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.