Navigate 2025: Key Estate Tax Proposals You Need to Know

As we look ahead to 2025, significant changes to the estate tax landscape are on the horizon. The U.S. Department of the Treasury’s General Explanations of the Administration’s Fiscal Year 2025 Revenue Proposals, known as the Greenbook, presents a series of tax reform proposals aimed at reshaping how estate and gift taxes are managed. The Greenbook, part of President Biden’s proposed budget for his second term, is designed to ensure that wealthier individuals and corporations pay a fairer share of taxes. Among the key proposals, several focus on closing existing estate and gift tax loopholes, which could have substantial implications for estate planning.

These changes, if enacted, could generate an estimated $97.2 billion in additional revenue over the next decade. Though these proposals are still far from becoming law, understanding their potential impact is essential for individuals and families seeking to navigate the evolving estate tax landscape. Here's a closer look at the proposed changes and what they mean for estate planning in 2025.

Closing Estate and Gift Tax Loopholes

The Greenbook outlines proposals aimed at closing what it describes as "estate and gift tax loopholes" that allow the wealthy to reduce their tax burdens through complex trust arrangements. While these are not yet legislative actions, they indicate the areas that the Biden administration may target in the coming years. The proposed changes include:

• Modifying Grantor Trust Rules: Grantor trusts, including Grantor Retained Annuity Trusts (GRATs), are a common tool used in estate planning to minimize gift and estate taxes. These trusts allow individuals to transfer assets to heirs with minimal tax consequences. The Greenbook proposes changes to these rules to reduce their effectiveness as tax avoidance strategies.

• Reclassifying Appreciated Asset Transfers: Another significant proposal would alter the taxation of capital gains on appreciated assets transferred during life or at death. Currently, these transfers can avoid capital gains tax through a "step-up" in basis, but the Greenbook seeks to tax unrealized capital gains when certain transfer events occur, such as transfers of appreciated property by gift or death.

• Minimizing Valuation Discounts for Intrafamily Asset Transfers: Family members often use valuation discounts when transferring assets, such as real estate or marketable securities, to reduce the taxable value of the gift. The Greenbook proposes eliminating or limiting these discounts, particularly when family members collectively own at least 25% of the property in question.

Impact of Proposed Modifications to Grantor Trusts

Grantor trusts, including GRATs, have long been used as tools to shift appreciating assets out of an individual's estate with minimal tax liability. The Greenbook proposes several changes that would make these strategies less effective:

Taxable Sales to Grantor Trusts

Currently, sales between a grantor and a grantor trust are not recognized as taxable events. Under the Greenbook's proposal, such sales would be subject to taxes, reducing the ability to remove future appreciation from a taxpayer's estate without incurring tax liabilities.

Income Tax Payment as a Taxable Gift

The Greenbook suggests treating the payment of taxes on grantor trust income by the trust owner as a taxable gift. This would occur in the year the tax is paid, unless the trust owner is reimbursed by the trust in the same year.

Limiting GRAT Strategies

The Greenbook also seeks to eliminate the use of short-term GRATs and zeroed-out GRATs, strategies used to minimize gift taxes by structuring a GRAT so that the remainder interest is valued at or near zero.

Changes to Capital Gains Taxation on Appreciated Assets

One of the most far-reaching proposals in the Greenbook involves reclassifying how appreciated assets are taxed. Under current law, individuals can transfer appreciated assets to heirs without realizing capital gains, provided the recipient receives a "step-up" in basis. The Greenbook proposes taxing these unrealized capital gains at the time of transfer, whether the transfer is made during life or at death.

This proposal could have a major impact on high-net-worth individuals who currently use the step-up in basis to avoid paying taxes on long-held assets. If the proposal is enacted, the new rules would apply to transfers made through gifts, bequests, and certain trust transactions, triggering taxes on unrealized gains at the time of the transfer.

Reforming Intrafamily Asset Transfers

Another area where the Greenbook proposes changes is in the use of valuation discounts for intrafamily asset transfers. Valuation discounts are commonly used when transferring assets that are hard to value, such as shares in family-owned businesses, art, and real estate. These discounts reduce the overall taxable value of the transfer, allowing families to pass on assets while minimizing estate taxes.

The Greenbook aims to reduce or eliminate these discounts when family members collectively own at least 25% of the property being transferred. Additionally, the proposal suggests that the value of a transferred partial interest should be based on the fair market value of the total property owned by both the transferor and their family members. This would eliminate the ability to claim discounts for marketability and control, which have been a common way to reduce the taxable value of assets.

The Potential Impact of Estate Tax Exemption Reductions

Another significant proposal concerns the federal estate and gift tax exemption. Under the Tax Cuts and Jobs Act (TCJA) of 2017, the estate and gift tax exemption was temporarily increased to $11.7 million per individual (adjusted for inflation). This exemption is scheduled to revert to approximately $5.5 million per individual in 2026, unless Congress acts to extend the higher exemption.

The Greenbook does not directly address the exemption amounts but indicates that the administration is considering measures to ensure that the wealthiest individuals do not disproportionately benefit from the higher exemption. If the exemption is reduced, individuals with large estates may face higher estate and gift taxes, potentially requiring them to adjust their estate plans to account for the new limits.

Implications for Estate Planning

These proposed changes could significantly alter the estate planning landscape, especially for individuals with substantial estates. To stay ahead of these changes, individuals may need to consider adjusting their estate plans to account for:

• Increased Tax Liabilities: With the possibility of higher estate and gift taxes, wealthy individuals may need to reconsider their gifting strategies and explore new ways to minimize tax burdens.

• Reviewing Trusts and Estates: Changes to grantor trust rules and appreciated asset transfers could necessitate modifications to existing trusts, including GRATs, to comply with new regulations.

• Planning for Capital Gains Taxes: The Greenbook’s proposal to tax unrealized capital gains on transferred assets could lead to significant tax liabilities for heirs. It will be crucial to plan for these potential taxes and ensure liquidity to cover any tax obligations.

• Considering Family Transfers: Families who have used valuation discounts for asset transfers will need to re-evaluate their strategies, as the Greenbook aims to eliminate or reduce these discounts.

Conclusion

The estate tax proposals in the 2025 Greenbook represent a major shift in tax policy that could affect high-net-worth individuals and families. While these proposals are still in the early stages and are far from being enacted, they highlight the administration’s focus on closing tax loopholes and ensuring that wealthier individuals and corporations pay their fair share.

Estate planners and wealthy individuals should carefully monitor these developments and consider working with tax professionals to adjust their strategies in response to potential changes. By staying informed and proactive, individuals can continue to protect their assets and ensure their estate plans remain effective in the face of evolving tax laws.

If you need assistance in reviewing your estate plan or adapting to these potential tax changes, contact our office to schedule a consultation. Our team of estate planning attorneys can guide you through these complex issues and help you stay ahead of upcoming changes.