President Obama’s Fiscal Year 2012 Revenue Proposals: Proposals Relating to Individuals and Estate and Gift Taxation

Sullivan & Cromwell LLP - February 22, 2011

On February 14, 2011, the Obama Administration (the “Administration”) released the General Explanations of the Administration’s Fiscal Year 2012 Revenue Proposals (commonly known as the “Green Book”). Although the Green Book does not include proposed statutory language, the Green Book contains significant detail about the fiscal year 2012 revenue proposals. This memorandum discusses key aspects of the Green Book relating to individual, estate and gift taxation that we anticipate may be of interest to our clients. Many of the proposals are similar to the Administration’s Fiscal Year 2011 Revenue Proposals (the “2011 Green Book”). We are distributing separate memoranda addressing Green Book proposals relating to (1) corporate and partnership taxation, and (2) international taxation, both of which may be obtained by following the instructions at the end of this memorandum.

The Administration prepared and scored (i.e., estimated the impact on revenues of) the Green Book proposals by assuming that (i) the highest individual income tax rate will be 35% through 2012, after which it will rise to 39.6%, (ii) the current zero and 15% tax rates for qualified dividends and net long-term capital gains will be permanently extended for middle-class taxpayers, (iii) for upper-income taxpayers after 2012, the net long-term capital gains rate will rise to 20% and the rates for qualified dividends will return to ordinary income tax rates, and (iv) after 2012, a taxpayer’s itemized deductions will again be reduced by 3% of adjusted gross income. The Green Book proposals affecting the U.S. Federal income taxation of individuals include:

  • a 20% tax rate for qualified dividend income for upper-income taxpayers beginning in 2013 (in place of the 36% or 39.6% rates that would otherwise apply);
  • limiting the extent to which itemized deductions reduce tax liability by limiting the amount of tax liability that is reduced by itemized deductions to 28% of the value of the itemized deductions, even if the taxpayer has income that is subject to a tax rate higher than 28%;
  • making permanent the exclusion of 100% of capital gains from small business stock; and
  • providing an exclusion from cancellation of indebtedness income for certain student loan forgiveness.

The Administration also assumed in preparing and scoring the Green Book proposals that the estate tax would apply after 2012 at a rate of 45%, with a $3.5 million exemption amount (not indexed for inflation). The Green Book proposals, if enacted in their current form, would make the following changes to the U.S. Federal taxation of estates and gifts (effective upon the date of enactment):

  • require a minimum term of 10 years for a grantor retained annuity trust (“GRAT”), require that the initial value of the remainder interest in a GRAT be greater than zero, and prohibit any decrease in the stated annuity amount payable during the GRAT term;
  • make permanent the portability of a predeceased spouse’s unused gift and estate tax exemption;
  • limit the duration of the generation-skipping transfer (“GST”) tax exemption allocated to a particular trust to 90 years;
  • limit valuation discounts for estate and gift tax purposes by disregarding certain restrictions in valuing an interest in a family-controlled entity that is transferred from one family member to another; and
  • require that the recipient’s basis in property received upon death or by gift be no greater than the then-current value of the property as determined for purposes of the estate tax or gift tax, respectively, and require estates and lifetime donors to report to the recipient of such property and to the Internal Revenue Service information necessary to calculate the basis of the transferred property.