New Proposed Biden Tax Law Changes

Grantor Trusts

The grantor trust rules for income tax purposes are not the same as the rules for inclusion in the gross estate for estate tax purposes.

Accordingly, it is possible to create a trust that is a completed gift for gift tax purposes, is not included in the estate for estate tax purposes, but which is a grantor trust for income tax purposes.

The Administration proposes that if a taxpayer creates a grantor trust that is not fully revocable, sales between the grantor and the trust would be taxable, effective for sales on or after the date of enactment.

In addition, the grantor’s payment of the income tax on the trust’s income and gains would be treated as a taxable gift, effective for trusts created on or after the date of enactment.

Consistent Valuation of Promissory Notes

At present, taxpayers may be able to take inconsistent positions as to the value of a promissory note. A taxpayer may sell an asset for a note with interest at the applicable Federal rate, and subsequently claim a valuation discount for the note.

The Administration proposes to require that the discount rate of the note for estate and gift tax purposes be limited to the greater of the interest rate of the note or the applicable Federal rate for the remaining term of the note.

The proposal would be effective for valuation dates on or after the date legislation is introduced.

Administration of Trusts and Estates

The Administration proposes various changes to improve the administration of trusts and estates.

For estate tax purposes, if there is no executor or administrator appointed, qualified and acting, any person in actual or constructive possession of any property of the decedent is considered a statutory executor. However, this concept only applies for estate tax purposes. The Administration proposes to expand it to other tax matters, and to allow the IRS to adopt rules to resolve conflicts among multiple executors. This change would be effective upon enactment.

An estate may elect special use valuation to reduce the value of the estate by up to $1,230,000. The Administration proposes to increase this limit to $11.7 million, effective for estates of decedents dying after the date of enactment. There is a special estate tax lien for 10 years from the date of a gift, or from the date of death. The Administration proposes to extend the lien during any deferral or installment period for unpaid estate and gift taxes. Trusts do not presently have to report the value of their assets. The Administration proposes to required trusts with an estimated value over $300,000 or gross income over $10,000 to report their value.

Limit Duration of GST Exemption

Each taxpayer has a GST exemption. The GST exemption is $12,060,000 for 2022, and is indexed for inflation. It is scheduled to drop to one-half of its current level, indexed for inflation, beginning in 2026.

The common law rule against perpetuities is lives in being plus 21 years. Some states have a 90-year statutory rule against perpetuities.

In recent years, approximately one-half of the states have either repealed their rule against perpetuities or lengthened the permissible period of time under the rule against perpetuities, in some cases to as long as 1,000 years.

The administration proposes that the GST exemption would only apply 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 above is a beneficiary. The provisions resetting the transferor upon the payment of GST tax would not apply, and existing trusts would be treated as having been created on the date of enactment.

Tax carried interests as ordinary income

A partner may receive an interest in future partnership profits (a profits interest or carried interest) for services. To the extent the partnership recognizes long-term capital gain, the partner will reflect his or her share of the gain as long-term capital gain. Gain on the sale of a partnership interest is generally also capital gain.

Income attributable to a profits interest is generally subject to selfemployment tax, except to the extent the partnership generates types of income that are excluded from self-employment taxes, such as capital gains, certain interest, and dividends.

The Administration proposes to tax as ordinary income a partner’s share of income on an investment services partnership interest (ISPI) in an investment partnership if the partner’s taxable income from all sources is over $400,000. In addition, partners in such investment partnerships would be required to pay selfemployment tax on such income. Finally, the gain on the sale of an ISPI would be ordinary income if the partner is above the income threshold.

Repeal Section 1031 exchanges

Owners of appreciated real estate used in a trade or business may defer gain on the exchange of the property for other real property of a like kind.