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Saturday, August 16, 2014

ARTICLE ABSTRACT - Searching for Basis in Estate Planning: Less Tax for Heirs


Searching for Basis in Estate Planning: Less Tax for Heirs  




Estate Planning Journal, August 2014



ABSTRACT (Key Points & Discussions)

    1. Summary of Basis Rules from Gifts and Inheritances
    2. Depreciated Assets
      • Potential loss of basis  for loss computation purposes if a gift
        •     Donor may want to consider sale instead to realize the loss
      •   Donor may want to gift before death to avoid a basis step-down for gain computation purposes
    3. Appreciated Assets
      •  If no estate taxes expected, better to transfer at death rather than gift (to get basis step-up)
      • If estate taxes expected, more refined analysis needed that factors in size of the estate, anticipated appreciation, future exemptions and rates of tax, and basis of the property
    4. Use of Grantor Trust
      • Allows effective tax-free gift of income taxes
      •   Basis step-up allowed under Section 2014(b)(1) even though no gross estate inclusion??
        • IRS Chief Counsel Advice is contrary
      •   Low-basis assets can be gifted now, and then reacquired later to receive a basis step-up via nontaxable swaps
        • Plan to have higher basis assets on hand
        • Plan to re-swap assets quickly post-death before appreciation can occur
        • Assure power of attorney authorizes swap or sale in case of incapacity, and trust should authorize dealing with an attorney in fact
        • Consider need for appraisals to determine values for swaps
      • Obama Administration Budget Proposal could result in estate tax inclusion
    5. Use of Formula 2038 Power
      • Creating a reversion at grantor's death to extent it would create reduced overall transfer and income taxes
      • Discusses possible application of Sections 2036 and 2038
      • Discusses various pros and cons
    6. Grant Trustee Power to Give a GPA to a Beneficiary
      • To allow a basis step-up at beneficiary's death
      • Can require consent of non-adverse trustee to exercise, as a limit on the exercise
      • Risk of fiduciary liability for inappropriate granting or nongranting
    7. Affirmative use of Delaware Tax Trap
      • To give a beneficiary power-holder control whether to expose trust assets to estate tax
      • May apply to allow basis step-up even for items of IRD
    8. Use of Alaska Community Property Trust
      • To obtain basis step-up on all assets at death of first spouse
    9. Use of Supercharged Credit Shelter Trust
      • Spouses create inter vivos QTIP trusts. At death of first spouse, that spouse's trust continues for surviving spouse as a credit shelter trust, but one that is a grantor trust.
      • Risk of exposure to estate tax at second death under creditor rights doctrine as a general power of appointment
        • Mitigate via use of ascertainable standard
        • Mitigate via use of trust in jurisdiction where the doctrine does not apply
      • Discussion of timing issues
    10. Caution in Electing Alternate Valuation
      • Compare loss of basis with estate tax savings
      • Note that IRD items do not lose basis


Basis planning, carry-over basis, basis step-up, Delaware tax trap, Supercharged credit shelter trust, alternate valuation election


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