Proposed Tax Changes in 2025: The Big Picture
The Fiscal Year 2025 Budget proposed by President Biden includes a range of tax reforms intended to overhaul the tax system towards increased equity and efficiency. For a detailed report see the General Explanations of the Administration’s Fiscal Year 2025 Revenue Proposals.
The Biden administration’s 2024 budget proposes significant changes to the estate and gift taxation system, which could have a profound impact on how property transfers are taxed in the United States. Here’s a summary of the key proposals:
- Realization Events for Gifts and Death Transfers: Transfers of appreciated property by gift or upon death would be considered realization events, meaning capital gains taxes would apply at these times. The tax on capital gains at death would be deductible against the estate tax. Previously, transfer at death would enjoy a basis adjustment, typically a step up, resulting in no capital gains for the beneficiaries.
- Capital Gains Rate Increase: For individuals earning over $1 million, the capital gains tax rate would increase to 39.6%.
- Mark-to-Market for Trusts and Partnerships: Assets held in trusts or partnerships would be subject to a mark-to-market tax every 90 years, starting from January 1, 1944. This means the first such tax event would occur on December 31, 2033.
- Restrictions on Discounts for Partial Interests: No discount on partial interests would be allowed except for assets actively used in trade or business.
- Recognition Events for Trusts and Partnerships Transfers: Transfers to or from trusts (other than wholly owned revocable trusts) or partnerships would be treated as taxable events.
- Transfers to U.S. Spouses: These would not be considered realization events, but the transferred assets would have a carryover basis.
- Income Tax Rate Increase: The top income tax rate would also increase to 39.6%.
- Taxable Transfers to Split-Interest Trusts: Transfers to charitable lead trusts or charitable remainder trusts would be taxable except for the value of the charity’s interest.
- Exclusion and Portability: A $5 million per person exclusion for property transferred by gift or at death, indexed for inflation post-2024, with portability between spouses.
- Minimum Tax on High Wealth Individuals: A 25% minimum tax on total income, including unrealized capital gains, for individuals with wealth over $100 million, with provisions for installment payments.
- Changes to GRATs: Grantor Retained Annuity Trusts (GRATs) would have to have a minimum term of 10 years and other specified conditions.
- Taxable Sales and Gifts in Grantor Trusts: Sales between a grantor and a non-fully revocable trust would be taxable, and the grantor’s payment of tax on trust income and gains would be considered a taxable gift.
- Valuation Rules for Intrafamily Transfers: Intrafamily transfers of partial interest would be valued based on the pro rata share of the collective fair market value of the interests held by the family.
- Limit on Annual Exclusions: A limit on total annual exclusions for certain transfers would be set to $50,000 per year, indexed for inflation after 2025.
- GST Exemption Limitations: The generation-skipping transfer (GST) exemption would be limited to direct skips and taxable distributions to certain beneficiaries, and taxable terminations under specified conditions.
Possible Strategies for Mitigation
The election outcomes might lead to a situation where one party holds control of the House and the other controls the Senate, both with such narrow majorities that significant tax reforms may be unlikely to pass. However, if you are potentially negatively affected by the Biden tax reform proposals, read our follow on post Estate Planning Strategies to Adapt to Biden’s 2025 Budget Proposal on what you should consider doing now. Please see also our previous post Estate Taxes in 2025: Wait Until Too Late?
