Biden Administration Proposes to Limit GRATs

The Department of Treasury recently released its General Explanations of the Administration’s Fiscal Year 2023 Revenue Proposals (which is commonly known as the "Greenbook").

The Greenbook explains that in the Administration’s Fiscal Year 2023 Budget, the President proposed "a number of reforms that would enhance revenues, improve tax administration, and make the tax system more equitable and efficient."

These proposals intend to make Grantor Retained Annuity Trusts (GRATs) riskier "so they are less likely to be used purely for tax avoidance purposes."

Here is a summary  of the proposed changes to GRATs:

• For gift tax purposes, the remainder interest would have a minimum value  equal to the greater of 25% of the value of the assets transferred to the GRAT or $500,000, but not more than the value of the assets transferred.
• Any decrease in the annuity during the GRAT term would be prohibited.
• For income tax purposes, the grantor's acquiring in an exchange assets held in the trust would be a realization even, meaning the grantor would have to recognize gain or loss.
• A GRAT would be required to have a minimum term of ten years and a maximum term of the life expectancy of the annuitant plus ten years.
• The grantor's payment of the income tax on the income of a grantor trust would be a gift. That gift would occur on December 31 of the year in which the income tax is paid (or, if earlier, immediately before the owner's death, or on the owner's renunciation of any reimbursement right for that year) unless the deemed owner is reimbursed by the trust during that same year. The amount of the gift would be the unreimbursed amount of the income tax paid.

These proposed rules would be effective on or after the date of their enactment.