Administration’s Greenbook Proposal Will Make Trust Reporting Horrendous: Privacy Is Dead

Introduction to the Proposal

The Biden Administration has just issued the “General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals.” While some pundits might assure you that nothing can be enacted with a Republican House, don’t say never when it comes to Washington negotiations. One never can predict what might happen. Also, consider that negotiations over the debt ceiling could put lots of chips on the fiscal table. The so-called Greenbook proposals are harsh and could, similar to the tax proposals floating around in 2020-2021 completely change the face of estate planning. Just when you thought the fun was over… Many of the proposals are effective date of enactment so folks with wealth might want to start huddling with their tax advisor team ASAP to get planning done in advance. This article will explore but one of the joyful morsels in the new proposal, new reporting for your trusts. As you tearfully read what might await you below, consider that this is only one minor portion of the tasty tax meal the Administration has cooking for you.

The description of the government’s concern and the proposed changes are excerpted from the actual proposal. Quotations marks were not used. The commentary following that introduction is certainly just conjecture at this point. But hopefully those musings will help you understand what this might all mean.

New Trust Reporting

This particular proposal will require reporting of estimated total value of trust assets and other information about trusts. The proposals are pretty dramatic, will create incredible cost, put private information you will be uncomfortable disclosing on tax returns, and require considerable costs in terms of professional fees to comply with.

What The Administration is Trying to Accomplish

Although most domestic trusts are required to file an annual income tax return, there is no requirement to report the nature or value of their assets. As a result, the IRS has no statistical data on the nature or magnitude of wealth held in domestic trusts. Other agencies collect data on the amount of wealth held in some types of domestic trusts, but this data is not comprehensive. Because of the lack of statistical data on the nature and value of assets held in trusts in the United States, it is difficult to develop the administrative and legal structures capable of effectively implementing appropriate tax policies and evaluating compliance with applicable statutes and regulations. This lack of this data further hampers efforts to design tax policies intended to increase the equity and progressivity of the tax system.

What the New Trust Reporting Proposal Will Require

The proposal would require certain trusts to report certain information to the IRS on an annual basis to facilitate the appropriate analysis of tax data, the development of appropriate tax policies, and the administration of the tax system. That reporting could be done on the annual income tax return or otherwise, as determined by the Secretary, and would include the name, address, and TIN of each trustee and grantor of the trust, and general information with regard to the nature and estimated total value of the trust’s assets as the Secretary may prescribe. Such reporting on asset information might be satisfied by identifying an applicable range of estimated total value on the trust’s income tax return. This reporting requirement for a taxable year would apply to each trust whose estimated total value on the last day of the taxable year exceeds $300,000 (indexed for inflation after 2024) or whose gross income for the taxable year exceeds $10,000 (indexed for inflation after 2024). In addition, each trust (regardless of value or income) would be required to report on its annual income tax return the inclusion ratio of the trust at the time of any trust distribution to a non-skip person, as well as information regarding any trust modification or transaction with another trust that occurred during that year. This additional information will provide the IRS and taxpayers with current information necessary to verify the GST effect of any trust contribution or distribution without requiring either party to go back through multiple prior years’ records to determine that information.

When this New Rule Might Apply

The above proposal would have an effective date for taxable years ending after the date of enactment. That could be 2024. Just around the corner.

Anonymity is Gone

This proposal comes from the growing perception that trusts are mechanisms used by wealthy persons to evade taxation or by nefarious characters to pursue criminal or other endeavors. This new reporting would be costly and complex to administer and will come on the heels of the effective date of the Corporate Transparency Act (“CTA”) which will itself add burdensome reporting requirements to entities that are ubiquitous in estate planning. Any notion of privacy will either be eliminated by the combination of the trust reporting and the CTA, or will certainly feel to taxpayers, as if any anonymity has been eliminated.

How Do You Value A Painting or Family Business

With so many trusts owing hard to value property: residences, artwork, family businesses, real estate, etc. any required disclosure of value could be costly. Even if leniency is provided through permitting estimates, on what basis could estimates be obtained without some type of appraisal process?

Ripple Effects of Reporting Trust Values

The proposal suggests “identifying an applicable range of estimated total value on the trust’s income tax return.” What might this mean and what procedures will be necessary? This sounds as if it is suggesting something less than an appraisal which would be quite costly. But consider the implications. In litigation the plaintiff may well get access to the defendant’s income tax return, even if portions are redacted in chambers. But consider the implications in a lawsuit or divorce if now almost every trust has a range of values for assets that plaintiff’s counsel could access? Consider the implications in matrimonial cases? If a taxpayer is negotiating a prenuptial agreement in the current environment assets in a separate property, pre-marital, trust may not be disclosed or indicated. There is in many cases no estimates of those values to disclose. But now knowing these values are reported annually to the IRS might the dynamic of the non-monied spouse’s pre-marital demands change?

Low Thresholds Mean Many Trusts Affected

The thresholds for this reporting, $300,000 of net worth for a trust, assures that most trusts created for any substantive estate planning will be effected. The law would cast a wide net. The threshold is far too low considering the cost of compliance and administrative burdens. Perhaps if this is included in actual legislation Congress could be convinced to at least limit this to more valuable trusts.

Generation Skipping Transfer Tax Info May Be Tough to Confirm

Reporting the inclusion ratio of the trust for generation skipping transfer (“GST”) tax purposes might sound innocuous. Certainly, the stated goal of avoiding having to go back in the future through historical records, once the initial reporting is achieved might actually be helpful. But how will those records to corroborate the inclusion ratio be obtained for the initial reporting? For practitioners that did not prepare the initial gift or estate tax return reflecting the trust funding, how will that information be obtained? Many historical records have not been scanned. Many, perhaps most, taxpayers do not keep organized or complete records. So, if the practitioner filing the initial report did not create and assist with the funding of the trust for all years for which transfers were made, how will the GST inclusion ratio be determined? What level of review will be required, or desired, before such a figure can be reported? What will be done when those prior records cannot be obtained? What of the law and accounting firms that have merged or closed since the filings were completed?

Trustees Will Have to Give Lots of Private Info: But Who is A Trustee?

What will be a trustee for purposes of the above reporting requirements? Likely a broad definition will be used to make reporting more comprehensive. Thus, “trustee” might be defined as general, investment, distribution and other trustees. What about trust advisers? What about trust protectors? And what does the term “trust protector” even mean given the wide definitions and applications of that concept. Will this be limited to those acting only in a fiduciary capacity? If so, then practitioners will have to evaluate the status of each person and role to ascertain whether the person is acting in a fiduciary or non-fiduciary capacity. That may require not only consideration of the trust instrument but of the law in the jurisdiction where the trust has situs.

Even apart from the complications of determining who must be listed, consider the information desired. The proposal would require the reporting of the name, address, and TIN of each trustee. If a college roommate agreed to hold a power to loan funds to the settlor, or held a special power of appointment, if those roles are caught within the definitions, how will they feel about their personal information being disclosed to the IRS? The reality is that many of the people named in a variety of roles in different trust instruments never sign the trust document. If, for example, a spousal lifetime access trust (“SLAT”) were created and there was no present intent to hold life insurance, a family member or friend might nonetheless be designated as an insurance trustee so that if in the future insurance were to be held the structure would be in place to do so. That “standby” insurance trustee may not have signed the trust instrument and may not recall the quick phone call or text message from the settlor indicating that they would be appointed. How will their information be obtained to even contact them? How far will all of this go?