Tax Planning

Biden’s legislative proposals – how the proposed adjustments might have an effect on property and tax planning – and new legislative proposals affecting donor-advised funds and personal foundations

Biden’s legislative proposals

The Treasury recently published the Biden government’s revenue and tax policy proposals for the fiscal year 2022. Some of these proposals, if passed by Congress, would have a significant impact on estate and tax planning. The suggestions include:

  1. The upper ordinary income tax rate will be increased to 39.6% (43.4% including net capital gains tax).
  2. The tax rate on long-term capital gains and qualifying dividends from taxpayers with adjusted gross income greater than $ 1 million will be increased to the ordinary income tax rate, but only to the extent that the taxpayer’s income exceeds $ 1 million. This suggestion applies to profits that must be recorded after April 28, 2021.
  1. Gifts:The donor of an estimated asset would receive a capital gain at the time of donation equal to the excess of the fair value of the asset at the time of donation over the base of the donor in the asset (subject to a lifelong exclusion of $ 1 million). , described below), unless the valued asset is transferred to a U.S. spouse or charity.
  2. Trust transfers: Transfers of ownership and distributions in kind from a trust fund or other corporation (with the exception of a grantor trust which is wholly owned and revocable by the grantor) are deemed to be liquidation events and are subject to profit tax.
  3. Death: The deceased owner of an estimated asset would realize a capital gain on the date of death equal to the excess of the asset’s fair value on the date of death over the base of the deceased in the asset (subject to an exclusion of $ 1 million, described below).
  4. Time lapse: Gains from unrealized appreciation are considered recognized by the owner (including trusts, partnerships or other non-corporation companies) if this property has not been the subject of a recognition event in the previous 90 years, starting January 1, 1940. According to the According to the Treasury Department, this means that the first possible realization date for estimated assets held in trust or in person would be December 31, 2030.
  5. Exclusions:
  • A $ 1 million exclusion from the presumed realization of capital gains on gifts or assets held at death would be granted to any person and would be transferable to the surviving spouse of a testator.
  • in addition to the $ 1 million exclusion described above, the $ 250,000 capital gain exclusion for primary residences would persist and be transferred to the surviving spouse of the deceased.
  • The transfer of tangible personal property (other than collectibles) does not incur capital gains tax.
  • Transfers to a U.S. spouse and transfers to charities do not incur capital gains tax (although transfers to split interest trusts would only allow for exclusion for the charity’s portion).

6. Treatment of Losses: Capital losses and carry-forwards would still be allowed, and taxes on as realized gains would be deductible on the testator’s inheritance tax return.

The proposals (except as noted above) would take effect on transfers and assets held after December 31, 2021 in the event of death, as well as assets owned by trusts, partnerships, and other non-corporations on January 1, 2022 .

The likelihood that any of these proposals will be implemented is uncertain. It should be noted that there are other legislative proposals that affect estate planning in the House and Senate. It is currently unclear what future tax laws will provide. We will continue to monitor the situation and inform you about relevant developments.

Accelerating Charitable Efforts Act by Senators Grassley and King

On June 9, 2021, Senators Chuck Grassley and Angus King introduced the Accelerating Chartable Efforts Act, or ACE Act, which aims to expedite charitable giving from donor advisory funds (DAFs) and private foundations. The highlights of the recently introduced legislation include the following proposals:

  • Restrictions on Charity Deduction for DAF Contributions
  1. 15 Year Income Tax Requirement: To qualify for an early deduction of charitable contributions from income tax, contributions must be made to either “qualified” DAFs, defined as DAFs that require contribution distributions (or advisory privileges released), within 15 years of the Time at which these contributions are made or to “qualified community foundations” DAFs that have been established with qualified community foundations and meet one of the additional requirements listed below.
  2. Deduction Limitation on Non-Publicly Traded Assets: Deduction for contributions from non-publicly traded assets to such DAF would only be allowed after the fund sponsor sold those assets and would be limited to the amount of gross sales proceeds.
  3. 50-year DAFs: Alternatively, DAF accounts and related advisory privileges could be established for a period of up to 50 years, but in such case no deduction would be allowed until distributions have been made and only up to the size of those distributions. Contributions in kind to “50 year old” DAFs (or “unqualified” DAFs) would not be eligible for income tax deduction until those assets were sold and distributed and would be limited to the amount of that distribution.
  • Additional requirements for qualified Community Foundation DAFs
  1. DAF accounts opened with qualified community foundations must distribute at least 5% of their value each year.
  2. This does not apply to accounts with a value of USD 1 million or less.
  • Handling of DAF contributions to public charities

As suggested, donations from a DAF for the purpose of determining the level of public support to a receiving charity will be treated as if they were received by an individual (which may include the DAF’s donor if identified by the sponsoring organization). In contrast, under applicable law, donations from a DAF to a charity, like any other public charity, are made to determine the amount of public support to the receiving charity.

  • New provisions for private foundations
  1. Exclusion of DAF distributions of 5% or more qualifying distributions: Private foundations that are already required to make qualifying distributions of 5% of their value each year would be prevented from fulfilling these obligations through distributions to DAFs or by paying administrative costs to certain disqualified persons, including Salaries paid to family members of founders.
  2. Net Withholding Tax Exemption for Certain Private Foundations: Private foundations making qualifying distributions of at least 7% of their value each year and new private foundations with a term of 25 years or less would be exempt from net withholding tax of 1.39%. .
  3. Additional disclosures for donations to DAFs: Private foundations that already had to disclose contributions to DAFs in their annual income would now also have to disclose any “donation advice” given to the DAF sponsor. This provision, while not entirely clear, would likely include any donation recommendation made to the DAF by a trustee, director or officer of the private foundation who has made such a contribution, particularly if the trustee, director or officer is considered to be Adviser to the DAF acts. Note that this disclosure must be made for all statements filed after December 31, 2021.
  1. The proposals regarding the availability of the charity deduction for DAF Contributions and the proposal regarding the treatment of DAF Contributions for the purpose of public support assessment apply, if passed, to contributions made after the Effective Date become.
  2. If passed, the changes to the treatment of private foundation administration costs would apply to tax years beginning after December 31, 2021, while the changes to the distribution of private foundations to DAFs would apply to distributions beginning after December 31, 2021 December 31, 2021 and the declarations submitted after December 31 must be submitted on December 31, 2021.
  3. The remaining proposals, if adopted, would apply to tax years beginning after the Effective Date.

Previous proposals to speed up the distribution of DAFs and private foundations have been viewed as controversial and have divided the nonprofit sector. However, the experience of the pandemic may have changed views on the role of DAFs and private foundations in the nonprofit sector, and therefore such laws may find more support than in the past. It is currently difficult to estimate the likelihood of a passage. We will continue to monitor the legislation and inform you about relevant developments.

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