The Green Book -What the Administration’s 2024 Revenue Proposals Mean for You and Your Estate Plan (1 of 3)

Green Book for 2024 (March 9, 2023)

On March 9, 2023, the Biden administration offered budgetary proposals that could, if enacted, affect estate planning, particularly for high-income taxpayers, the administration of post-mortem trusts and decedent’s estates and the tax rules for trusts.  These proposals are found in the Administration’s Green Book, which is an annual exercise explaining the administration’s budget for the next fiscal year.  This discussion of the proposals affecting estate planning will be divided int a series of three articles, and this first article will address the proposals that target

• Excessive accumulations of wealth by high-income taxpayers using tax-favored retirement accounts (Roth IRAs) and
• Use of “back door” Roth conversions by high-income taxpayers. 

 
The second and third articles will address the address the administration of post-mortem trusts and decedent’s estates and then the proposed changes to the tax rules governing trusts.

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Targeting High-Income Taxpayers’ Retirement Account

Retirement Security vs. Wealth Transfer Tool

Because of the special tax treatment afforded retirement accounts, some high-income taxpayers use these accounts - not for retirement security – but as wealth transfer tools. 

An individual is in the high-income category if their modified adjusted gross income is over $450,000 if married filing jointly, over $425,000 if head-of-household, or over $400,000 in other cases.

In 2021, eighty-seven percent (87%) of taxpayers, sixty-years-old or older, had some type of retirement savings.

• In 2021, the average balance in these retirement accounts was $141,542.

​These retirement accounts are consistent with the law’s purpose that retirement accounts such as IRAs, 401Ks and Roth IRAs serve to provide retirement security.  However, as of 2022, the Joint Committee on Taxation estimates

• more than 28,000 retirement accounts hold $5 million or more, and
• roughly 500 taxpayers have retirement accounts worth $25 million or more.

The Administration believes that because high-income taxpayers have other sources of income, they are not inclined to take any distributions from their Roth IRAs.  While the law compels taxpayers to eventually take required minimum distributions (RMDs) from ordinary retirement accounts (non-Roth IRAs), the law exempts Roth retirement accounts from the yearly distribution mandate.  Consequently, these taxpayers - who have other sources of retirement income  - can choose not to withdraw any money from these accounts. This allows assets in the Roth retirement accounts to keep growing tax-free (i.e., no payment of taxes on investment earnings, such as dividends, interest or capital gains). 
The wealth transfer occurs when the taxpayer dies.  The taxpayer’s heirs will inherit the accumulated assets, which grew tax free, without having to pay any income taxes being owed if the heirs follow the rules.  (While not subject to income taxes, these inherited assets will still be included in the calculation of estate taxes.)

Special Distribution Rules for Large Account Balances ($10 Million or More)

To curb the excessive accumulation, a high-income taxpayer with an aggregate vested account balance in a Roth retirement account exceeding $10 million would be required to distribute a minimum of 50 percent of the amount exceeding $10 million.
 
If the high-income taxpayer balance exceeds $20 million, then the taxpayer would be subject to minimum distribution amount (“floor”).  This floor amount would either be set by

1. the above proposal requiring a distribution of 50% of the amount in excess of $10 million or
   
2. the portion of retirement accounts held in a Roth IRA or designated Roth account. 

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Elimination of Backdoor Roth IRA

A backdoor Roth conversion is a strategy used by high-income earners who are prohibited from contributing to a Roth IRA because their income is above certain limits. Instead of contributing directly to a Roth, these high-income taxpayers contribute to a traditional IRA (which has no income limits), and then convert it to a Roth IRA.  Under the proposal backdoor Roth conversion would still be permitted for taxpayers with income above the Roth IRA contribution limit, but below the high-income earner limit.

Final Thoughts

While these are just proposals, if they became law the proposals as currently drafted would affect only the "fortunate few."   Nevertheless, these proposals could become a trend that ultimately will touch ordinary people like us, our loved ones and our futures.