The recently concluded 48th Annual
Accordingly, the primary message from this year’s
What this all means in a practical sense is that preserving the ability to delay decisions to the post-mortem context (such as through qualified disclaimer planning and the use of Clayton qualified terminable interest property elections) is now the name of the game. In addition, opportunities must be aggressively mined to force estate tax inclusion in non-estate taxable estates (taking into account state estate taxes) to fully utilize the tremendous vehicle for obtaining a tax-free step-up in basis that
Income Tax Versus Estate Tax
The most riveting plenary presentation this year was delivered by
In addition, proactive tax basis management becomes extremely critical. The old stalwart of planning with IDGTs can be extremely helpful here because in Revenue Ruling 2008-22, the
Moreover, Lee posited that partnerships (and limited liability companies) may provide the ultimate vehicle for proactive tax basis management. For example, a partial liquidation of partnership assets in favor of a senior generation family member when an IRC Section 754 election is made could potentially “strip basis” from the distributed assets and cause the amount of the stripped basis to be allocated among the remaining undistributed partnership property.4 Presumably, substantial partnership interests in such partnership may be held by younger generation family members or trusts established for their benefit. The distributed assets whose basis has been stripped (to give them a zero tax basis) would then benefit from a step-up in basis if the senior generation family member were to die holding them.5
In addition, this new world of proactive tax basis management recognizes that every U.S. citizen and resident possesses a valuable asset that can be put to productive use – namely, a federal applicable exclusion amount that in 2014 can shelter up to
Moreover, determining the appropriate course to take is highly sensitive to the particular state in which the client resides, because some states (such as
Grappling with Portability
Now that portability of the DSUE amount is permanent under
Portability will ensure a step-up in basis of the subject assets at the surviving spouse’s death and may appeal to clients as a reason to avoid having to plan their estates. The consensus at Heckerling, however, was that portability doesn’t dispense with the need to consider using credit shelter trusts (which could include a trust of which the sole lifetime beneficiary is the surviving spouse) in estate planning in many instances. Indeed, it’s incumbent on the estate planner to “drill down” on the facts to advise the client how best to proceed.
The following considerations may continue to support the use of credit shelter trusts in lieu of relying exclusively on portability:
- There are substantial non-tax benefits to be derived from using trusts, including asset protection, asset management and restricting transfers of assets by a surviving spouse (particularly if there are children from a prior marriage, or concerns about a subsequent remarriage).
- Portability doesn’t generally apply for state estate tax purposes, including in “decoupled” states such as New York. Thus, a well-drafted estate plan for a
New Yorkmarried couple might still involve funding a credit shelter trust with the largest amount capable of passing free of New York Stateestate tax (currently $1 million) to avoid wasting the New York Stateestate tax exemption of the first spouse to die.
- A step-up in basis may nevertheless be achieved over assets in a credit shelter trust by giving the surviving spouse a general POA over the property of the credit shelter trust (such as by allowing the surviving spouse to designate by her will that some portion of the trust property shall be paid over to her estate upon her death) in a formula amount equal to the largest amount capable of passing free of federal estate tax as finally determined for federal estate tax purposes. This general POA will cause estate tax inclusion over the property that’s subject to it, thereby producing a step-up in basis to such extent.
- The DSUE amount isn’t indexed.
- Depending on subsequent facts and circumstances, the DSUE amount may be lost if the surviving spouse remarries and survives his next spouse.
- With portability, growth in assets isn’t excluded from the gross estate of the surviving spouse. In contrast, growth in the assets of a credit shelter trust is excluded from the gross estate of the surviving spouse.
- A credit shelter trust can be used to shield hard-to-value assets from valuation disputes with the
IRSon the death of the surviving spouse, because such assets wouldn’t be part of the surviving spouse’s gross estate.
- There’s no portability of the GST tax exemption. So planning with trusts (including lifetime QTIP trusts for which a reverse QTIP election under IRC Section 2652(a)(3) would be made) will still generally be warranted if GST tax planning for grandchildren and more remote descendants is desired.
- A well-conceived estate plan could involve relying upon the portability of the applicable exclusion amount and then having the surviving spouse gift the DSUE amount to an IDGT to obtain the benefits of grantor trust status that generally wouldn’t be available for a credit shelter trust, including effective income tax-free compounding of the trust principal and the ability to “swap” assets from time to time to achieve a de facto step-up in basis upon the second spouse’s death.
In light of the Supreme Court’s decision in
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