Navigating the Fiscal Year 2025 Greenbook: Key Trust and Estate Tax Proposals

The U.S. Department of the Treasury has released its General Explanations of the Administration's Fiscal Year 2025 Revenue Proposals. Commonly referred to as the Greenbook, this document lays out tax proposals that would support President Biden's policy priorities if he is reelected to a second term.

This year's Greenbook primarily focuses on increasing taxes on corporations and high-income individuals to ensure that "the wealthy and corporations pay their fair share," says the Biden administration.^[1]

Some of the proposals in the administration's budget would modify estate and gift taxation, helping to generate an estimated $97.2 billion in additional revenue over ten years.^[2] These proposals are still a long way from being enacted, but they bear monitoring from an estate planning perspective.

The 2025 Greenbook Proposes Closing Estate and Gift Tax Loopholes

Tax proposals in the 2025 Greenbook are not proposed legislation; Congress must introduce and pass each budget item to become law.

However, the Greenbook provides insight into tax matters the Biden administration could prioritize in a second term. Among them is closing what the Greenbook calls "estate and gift tax loopholes" that "allow the wealthy to reduce their tax by using complicated trust arrangements to transfer their assets to their heirs."^[3]

Three proposals in the Greenbook address the following trust and estate tax issues^[4]:

• Modifying grantor trust rules that allow significant value to be removed from an estate without being taxed
• Reclassifying certain appreciated asset transfers so they are subject to capital gain taxes
• Minimizing or eliminating valuation discounts for some intrafamily asset transfers

Grantor Trusts

The 2025 Greenbook outlines a plan for modifying tax rules for grantor trusts, including grantor retained annuity trusts (GRATs).^[5] 

According to the Greenbook, grantor trusts and GRATs allow taxpayers to use three common tax planning strategies to significantly lower their combined federal income, gift, and estate tax burden:

• Funding a GRAT with accounts and property (assets) that the grantor expects to appreciate and structuring the GRAT in such a way that incurs very little gift tax when appreciated assets are transferred to the remainder beneficiaries
• Selling an appreciating asset to a grantor trust of which the taxpayer is considered the owner for income tax purposes, allowing the taxpayer to remove future asset appreciation from their gross estate without the recognition of capital gains on the sale or the payment of gift or estate tax
• Reselling an appreciated asset from the grantor trust back to the trust's owner, making the purchase disregarded for income tax purposes and not subject to capital gains tax

The Greenbook proposes the following changes to grantor trusts:

• Recognize sales between a grantor and a grantor trust as taxable and require the seller to pay taxes on them.
• Treat the payment of grantor trust income taxes by the trust owner as a taxable gift to the trust that would occur on December 31 of the year in which the tax is paid (unless the owner is reimbursed by the trust that same year).
• Impose a minimum value on a GRAT's remainder interest for gift tax purposes.
• Require a minimum and maximum term for GRATs.
• Prohibit a GRAT grantor from engaging in tax-free exchanges of trust assets. 

Accounting firm BDO USA writes that these proposals would overturn the Internal Revenue Service rule that disregards grantor/grantor trust transactions as taxable events. The GRAT proposals would also effectively eliminate short-term GRATs used as part of a "rolling GRAT strategy" and prohibit "zeroed-out GRATs," says BDO.^[6]

Appreciated Property Transfers

Another reform proposed in the 2025 Greenbook that has trust and estate planning implications deals with the taxation of capital income (i.e., capital gains tax).

Under current tax law, when someone (a donor) gifts an appreciated asset to another person (a donee) during the donor's lifetime, there is no realization of capital gain by the donor when they make the gift. In addition, the donee does not have to recognize the capital gain until they dispose of the appreciated asset.

When a deceased person passes on an appreciated asset upon death, the recipient receives an adjusted basis equal to the asset's fair market value at the time of the decedent's death. If the basis adjustment is a step-up, the post-death transfer will allow the gift recipient to avoid federal income tax on asset appreciation during the decedent's lifetime, as the adjustment in basis had wiped out all such gain.

The Greenbook describes these rules as giving preferential tax rates on capital gains that primarily benefit high-income taxpayers, resulting in many of them paying a lower tax rate than middle-income earners. Proposals in the Greenbook would tax unrealized capital gains on transferred appreciated property when the following "realization" events occur:

• Transfers of appreciated property by gift or death
• Property transfers to or from most types of trusts
• Property distributions from revocable grantor trusts to persons other than the trust's owner or their spouse

BDO calls the proposal a radical departure from how capital assets are currently recognized as income. The addition of realization events would consider a sale of a capital asset to have occurred even when there was no sale, unlike now, when there must be a sale or property exchange to generate a capital gain.

Taxpayers may not have the money to pay the capital gains tax incurred from a new realization event because the transferor does not receive cash in exchange for the property transferred. Thus, these transferors need meticulous planning to avoid liquidity issues surrounding a deemed sale. This could result in selling assets other than those transferred to pay the tax.

Intrafamily Asset Transfers

Family members can transfer hard-to-value assets from one member to another to lower their tax burden. The 2025 Greenbook cites two ways this can be achieved:

• Transfer portfolios of liquid assets, such as marketable securities, into partnerships or other entities; make intrafamily transfers of interests in those entities (rather than transferring the actual liquid assets); and then claim entity-level discounts for valuing the gifted asset.
• Make intrafamily transfers of partial interests in other hard-to-value assets (e.g., art, real estate, and intangibles), allowing each family co-owner to claim "fractional interest discounts."

According to the Treasury, these strategies take advantage of a lack of marketability and control factors used to determine the fair market value of such partial interests. Still, they are inappropriate when families act together to maximize their economic benefits and artificially reduce the transfer tax due.

The 2025 Greenbook proposes to reform these intrafamily asset transfers by:

• reducing or eliminate discounts related to marketability and control when transferring partial interests within a family if the family collectively owns at least 25 percent of the property and
• making the transferred partial interest's value equal to its pro rata share of the total fair market value of all interests in the property held by both the transferor and their family members. This collective fair market value would be calculated as if a single individual owned all interests in the property.

This proposal would replace section 2704(b) of the Internal Revenue Code.

"Family members," for purposes of the proposal, would include the transferor, ancestor, descendants of the transferor, and the spouse of each family member.

Stay Ahead of Trust and Estate Tax Changes In THE 2025 GREENBOOK

Themes of fairness and cracking down on what the Biden administration considers tax avoidance strategies by wealthy individuals figure prominently in this year's Greenbook.

The future of Biden's fiscal year 2025 budget recommendations is highly uncertain. However, proposed changes to grantor trusts, intrafamily asset transfers, and unrealized capital gains could significantly impact how wealthy families approach estate and gift taxes and necessitate new and creative estate planning strategies.

Thinking about the what-ifs of the 2025 Greenbook proposals can be a valuable exercise for staying one step ahead of changes to the tax code. Book a call to review your estate plan and prepare for what could be coming.

[1] The White House, Fact Sheet: The President’s Budget for Fiscal Year 2025(Mar. 11, 2024), https://www.whitehouse.gov/briefing-room/statements-releases/2024/03/11/fact-sheet-the-presidents-budget-for-fiscal-year-2025.

[2] President Biden’s FY 2025 Budget Again Calls for Corporate and Individual Tax Increases, PWC (Mar. 2024), https://www.pwc.com/us/en/services/tax/library/biden-fy2025-budget-calls-again-for-corporate-and-individual-tax-increases.html.

[3] U.S. Dep’t of the Treasury, U.S. Department of the Treasury Outlines Tax Proposals to Reduce the Deficit, Lower Costs for Working Families, and Ensure the Wealthy and Large Corporations Pay Their Fair Share (Mar. 11, 2024), https://home.treasury.gov/news/press-releases/jy2169.

[4] U.S. Dep’t of the Treasury, General Explanations of the Administration’s Fiscal Year 2025 Revenue Proposals (Mar. 11, 2024), https://home.treasury.gov/system/files/131/General-Explanations-FY2025.pdf.

[5] A GRAT is an irrevocable trust that holds assets of the trustmaker and makes annuity payments to the grantor for a specified term. At the end of the term, the property in the trust is paid out to the beneficiaries designated in the trust by the trustmaker.

[6] BDO, Treasury, White House Release FY 2025 Budget and Green Book Detailing Administration’s Tax Proposals (Mar. 2024), https://www.bdo.com/getmedia/423f43f4-2e3a-4111-bcf2-094eb19fe544/TAX-Fed-Tax-Green-Book-Alert-2024.pdf?ext=.pdf.