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The New Green Book for Dummies & What It Means For Estate Planning

Here’s what you need to know about Biden’s proposed plans, possible tax reforms and how your estate plan could be affected if any of these changes are enacted.

May 28, 2021 marked a significant day for anyone with an Estate Plan. Not only did the Biden administration release its budget proposal for 2022, the Treasury Department also released its highly anticipated Green Book.

The Green Book contains sweeping tax reform proposals that will affect both individuals and corporations. A big question that everyone’s asking is, how will these tax reforms impact estate planning? 

What Is The Green Book?

The Green Book is a name widely used to refer to the Department of Treasury’s “General Explanations of the Administration’s Fiscal Year 2022 Revenue Proposals” document. It was released on May 28, 2021, alongside the fiscal year 2022 budget proposal issued by the Biden Administration.

As a part of its budget proposal, the White House announced two major legislative plans: the American Families Plan and the American Jobs Plan. The Green Book details the proposed tax reforms that accompany these two plans.

Treasury Department officials have stated that the Green Book is intended as a “starting point” for Congress. Many discussions will take place, and proposals contained within the document can still be expanded upon, changed, or removed completely. Although not all changes will be enacted, the Green Book provides key insights to sweeping tax reform in the pipeline.

Biden’s Legislative Plans

Before we can dive into tax reforms proposed in the Green Book, it’s helpful to get the landscape of Biden’s legislative plans. After all, it’s these tax changes that will help fund projects and initiatives. The two main plans setting the tone for his current efforts are the American Jobs Plan and the American Families Plan.

The American Jobs Plan

The American Jobs Plan proposes a strategy to strengthen the American economy through infrastructure, manufacturing, and research. 

It primarily focuses on corporate and business tax reform, along with a prioritization on clean energy. The White House fact sheet regarding the plan outlined projects such as rebuilding infrastructure, investing in research and development, and creating good-quality jobs for Americans.

The American Families Plan

The American Families Plan mostly affects individuals, so those with an estate plan will want to pay close attention to any changes made in this area. The Biden administration describes this plan as an investment in children, families, and the economic future. 

Biden hopes to rebuild the economy into even better shape than it was in before the pandemic. He wants to build up a strong middle class, which he calls the “backbone of America.” Highlights of the plan include adding free and affordable options for education, as well as providing financial support and tax breaks for child care. 

In order to do so, Biden’s tax agenda aims to reverse parts of the 2017 tax act. His focus centers on increasing taxes for higher-income individuals. He aims to help lessen the wealth gap and improve equity for lower-income households. This is mainly where impacts on estate planning can take place, which we’ll expand on next.

Green Book Tax Reform Proposals

The Green Book details 103 pages’ worth of tax reform proposals that would support Biden’s vision for revitalizing the American economy. From an estate planning perspective, it’s helpful to focus specifically on the proposed changes that would affect income tax, estate tax, gift tax, and capital gains tax. 

Here are some of the highlighted proposals found in the Green Book:

  • The top ordinary income tax rate will increase from 37% to 39.6% in the 2022 tax year onward. 

  • The top ordinary income tax bracket will be lowered from $523,601 to $452,700.

  • Capital gains and qualified dividends will be taxed at ordinary income tax rates for individuals with an income over $1 million. The highest rate will be 43.4%, which is a combined rate of the increased income tax of 39.6% and net investment income tax of 3.8%. Note that the taxation only occurs to the extent that income exceeds $1 million.

  • For individuals with incomes over $400,000, carried interest will be taxed as ordinary income. 

  • Any transfer of property will be treated as a sale and will trigger capital gains tax, including any gifts and any property transferred at death. Any gains over $1 million will be taxed at the new tax rate of 39.6% plus the 3.8% net investment tax. Transfers to a spouse or to charity are excluded.

What Does the Green Book Mean for Estate Planning? 

The Green Book explains that the current rules disproportionately benefit high-income individuals. They’re incentivized to make economically “unproductive” choices. They will acquire assets and put off paying taxes by holding onto them and transferring them upon death. Under the new plan, this strategy will no longer work.  

Again, not all of these proposed changes in the Green Book will be enacted. However, it’s a good idea to know what may be coming through the pipeline so that you can be prepared.

The main proposal impacting estate planning is the reformation of capital gains taxes. First, capital gains will be taxed at ordinary income tax rates, which are set to increase. The key change, however, is how the transfer of assets will be treated, and the long-awaited proposal to get rid of step-up in basis.

Under the current rules, capital gains are made if you sell an asset for more than your basis. Your basis is the original price or value for which you acquired the asset. If you transfer assets to a charity or an heir through your estate plan, capital gains will only be realized if that asset is sold. Even then, the taxable amount is based on the stepped-up basis, which is the reset value of the asset at the time of your death. This is a large advantage; the value change of the asset during your lifetime is never taxed. 

Under the new plan, Biden is proposing to treat death as a realization event, and to get rid of stepped-up in basis completely. This means that if you pass away, any appreciated value of your assets will be taxed as capital gains, regardless of if you gifted that asset or bequeathed it to a beneficiary as a part of your estate plan. Further, that property won’t benefit from being taxed at the stepped-up in basis amount. The taxable capital gains will be the difference between the property or asset’s original and current market value. However, keep in mind that there are limits that come into play. For example, the first $1 million of capital gains income will not be taxed. There is also a proposed $250,000 per-person exclusion for capital gains on a principal residence. 

It’s Time to Review your Estate Plan

The proposed changes to how capital gains will be treated, including the elimination of step-up in basis, are significant. If passed, proposals in the Green Book would begin to take effect in 2022, so the time to review your estate plan is now. 

Even if some of these proposals don’t pass, it’s still a good idea to review and update your estate plan. This is because the 2017 tax act implemented by former President Trump only lasts for 10 years. The laws will revert back to the way they were in just five years. It makes sense to act now before any of these changes in the pipeline may affect you. 

Don’t forget that Trust & Will is here as a resource. A great place to start is our guide on Understanding Capital Gains Tax and how they can impact your estate. If you have any questions, don’t hesitate to reach out to one of our experts. 

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