A View from the Audience at Heckerling: Part V

A View from the Audience at Heckerling: Part V

What lurks on the horizon?

The Annual Heckerling Institute on Estate Planning always presents an opportunity for crystal ball gazing, and the principal fodder for such prognostication can include the Obama Administration’s “Greenbook proposals.  This year was no different, and I now also have the benefit of the Obama Administration’s Fiscal Year 2016 Greenbook proposals, which were issued shortly after Heckerling.

A Special $50,000 Capped Category of Annual Exclusions for Trusts?

There seems to be momentum towards establishing a “$50,000 super-category” of annual exclusion gifts that would envelop all of a donor’s gifts to trusts.  The Internal Revenue Service doesn’t like the use of “Crummey” powers in trusts to generate multiple annual exclusions by having the terms of the trust or other governing instrument confer on a multitude of beneficiaries rights of withdrawal that will likely go unexercised notwithstanding that notices may be given to the beneficiaries by the trustee and carefully documented. 

As clarified in its 2016 Greenbook, the Administration’s 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 (without regard to the existence of any withdrawal or put rights) and impose an annual limit of $50,000 (indexed for inflation after 2016) per donor on the donor’s transfers of property within this new category that will qualify for the gift tax annual exclusion.  This new $50,000 per-donor limit wouldn’t provide an exclusion in addition to the annual per-donee exclusion; rather, it would be a further limit on those amounts that otherwise would qualify for the annual per-donee exclusion.  Thus, a donor’s transfers in the new category in a single year in excess of a total amount of $50,000 would be taxable, even if the total gifts to each individual donee didn’t exceed $14,000.  The new category would include transfers in trust (other than to a trust described in Internal Revenue Code Section 2642(c)(2)), transfers of interests in pass-through entities, transfers of interests subject to a prohibition on sale and other transfers of property that, without regard to withdrawal, put, or other such rights in the donee, can’t immediately be liquidated by the donee.  The proposal would be effective for gifts made after the year of enactment.

Oh Canada!

Finally, let’s discuss the capital gains tax provisions that are contained in the Obama Administration’s Fiscal Year 2016 Greenbook proposals.  In addition to repeating such stalwarts of the 2015 Greenbook, such as restoring certain of the estate, gift and generation-skipping transfer tax parameters in effect in 2009, eliminating certain tax benefits that can be derived from sales and other transactions with grantor trusts and imposing a 10-year minimum term requirement for grantor retained annuity trusts (GRATS)—although with the new wrinkle of also imposing a 25 percent minimum remainder requirement, with the amount of the taxable gift to be at least $500,000 (but capped at the value of the property contributed to the GRAT)—there’s a significant new proposal that can only be described as “Oh Canada!”

Following Canada as a model with respect to imposing a capital gains tax on appreciation in the value of property through a person’s death, and then extending this principle to apply as well to lifetime gifts of appreciated property, the Administration’s proposal would generally treat transfers of appreciated property as tantamount to a taxable sale.  The donor or deceased owner of an appreciated asset would realize a capital gain at the time the asset is given or bequeathed to another.  The amount of the gain realized would be the excess of the asset’s fair market value on the date of the transfer over the donor’s basis in that asset.  That gain would be taxable income to the donor in the year the transfer was made and to the decedent either on the final individual return or on a separate capital gains return.  The unlimited use of capital losses and carry-forwards would be allowed against ordinary income on the decedent’s final income tax return, and the tax imposed on gains deemed realized at death would be deductible on the estate tax return of the decedent’s estate (if any).  Gifts or bequests to a spouse or to charity would carry the basis of the donor or decedent.  Capital gain wouldn’t be realized until the spouse disposes of the asset or dies, and appreciated property donated or bequeathed to charity would be exempt from capital gains tax.

The Administration’s proposal would exempt any gain on all tangible personal property, such as household furnishings and personal effects (excluding collectibles).  The proposal also would allow a $100,000 per-person exclusion of other capital gains recognized by reason of death that would be indexed for inflation after 2016 and would be portable to the decedent’s surviving spouse under the same rules that apply to portability for estate and gift tax purposes (making the exclusion effectively $200,000 per couple).  The $250,000 per person exclusion under current law for capital gain on a principal residence would apply to all residences and would also be portable to the decedent’s surviving spouse (making the exclusion effectively $500,000 per couple).

The exclusion under current law for capital gain on certain small business stock would also apply.  In addition, payment of tax on the appreciation of certain small family-owned and family operated businesses wouldn’t be due until the business is sold or ceases to be family-owned and operated.  The proposal would further allow a 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.1

The Administration’s proposal also would increase the highest long-term capital gains and qualified dividend tax rate from 20 percent to 24.2 percent.  The 3.8 percent net investment income tax would continue to apply as under current law.  Thus, the maximum total capital gains and dividend tax rate including net investment income tax would thus rise to 28 percent.

To facilitate the transition to taxing gains at death and gift, the IRS would be granted authority to issue any regulations necessary or appropriate to implement the proposal, including rules and safe harbors for determining the basis of assets in cases where complete records are unavailable.  This proposal would be effective for capital gains realized and qualified dividends received in taxable years beginning after Dec. 31, 2015 and for gains on gifts of decedents dying after Dec. 31, 2015.


1. The Administration’s proposal also would include other legislative changes designed to facilitate and implement this proposal, including:  the allowance of a deduction for the full cost of appraisals of appreciated assets; the imposition of liens; the waiver of penalty for underpayment of estimated tax if the underpayment is attributable to unrealized gains at death; the grant of a right of recovery of the tax on unrealized gains; rules to determine who has the right to select the return filed; the achievement of consistency in valuation for transfer and income tax purposes; and a broad grant of regulatory authority to provide implementing rules.




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