Transcript Tools & Techniques of Estate Planning

Tax Basis Revocable Trust
Chapter 29
Tools & Techniques of
Estate Planning
What Is A Tax Basis Irrevocable Trust?
• An irrevocable trust structured to achieve a step up in
the income tax basis of property owned by either
spouse on the death of either spouse
• Uses a general power of appointment coupled with the
marital deduction so that all of the property owned by
the spouses passes through the taxable estate of the
first spouse to die
• There is little authority regarding use of this technique
to achieve a step up in basis, possible rejection by the
IRS
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Tax Basis Revocable Trust
Chapter 29
Tools & Techniques of
Estate Planning
When Is Use Of A Tax Basis Irrevocable Trust
Appropriate?
• Where one or both spouses owns appreciated
property
• Where one spouse owns considerably more
appreciated property than the other
• Where the combined estates of both spouses will be
less than the available exemption
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Tax Basis Revocable Trust
Chapter 29
Tools & Techniques of
Estate Planning
What Are The Requirements?
• Create a joint irrevocable trust or separate
irrevocable trusts by each spouse
• Spouse is given a general power of appointment over
assets transferred to the trust by the grantor spouse
• Spouse dies without exercising general power
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Tax Basis Revocable Trust
Chapter 29
Tools & Techniques of
Estate Planning
What Are The Requirements? (cont’d)
• Assets included in spouse’s estate at death, so tax
basis adjusted to FMV on date of death
• Provisions for surviving spouse should be drafted to
qualify for marital deduction (potential QTIP strategy)
Note: Techniques does not work if spouse exercises
general power, therefore only use in stable marriages
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Tax Basis Revocable Trust
Chapter 29
Tools & Techniques of
Estate Planning
How It Is Done – An Example
– Husband and wife, living in common law state, create a joint
irrevocable trust
– Each spouse retains nongeneral power to appoint property
contributed by him or her, to avoid gift on transfer to trust
– Upon death of either spouse, the deceased spouse may
direct payment of any of his or her debts or taxes from
assets contributed by the other spouse
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Tax Basis Revocable Trust
Chapter 29
Tools & Techniques of
Estate Planning
How It Is Done – An Example (cont’d)
– Husband contributes $500,000 from his separate assets to
the trust with an income tax basis of $100,000
– Wife dies more than one year after the transfer
– Wife had general power of appointment over the trust
therefore
• Trust property will be included in wife’s taxable estate, and
• The tax basis will increase to FMV of $500,000
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Tax Basis Revocable Trust
Chapter 29
Tools & Techniques of
Estate Planning
How It Is Done – An Example (cont’d)
– Will the trust property be included in the husband’s
estate upon his subsequent death?
• If assets transferred to husband using marital trust, yes
• If assets transferred to credit shelter trust, no
– To minimize subsequent estate tax exposure ( tax
implications) husband may
• Use a qualified disclaimer, or
• In the case of a QTIP trust, refrain from making the QTIP
election or only making a partial QTIP election when the
wife dies
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Tax Basis Revocable Trust
Chapter 29
Tools & Techniques of
Estate Planning
Issues In Community Property States
• The tax basis irrevocable trust is often recommended
as a way to achieve the same tax basis that would
result if the property were community property
• To the extent the property is community in nature, the
tax basis irrevocable trust is not necessary
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