A Tax-saving Opportunity
| Publication year | 2015 |
| Pages | 77 |
Articles
Trust and Estate Law
A Tax-Saving Opportunity
By James R. Wade
Coordinating Editors
David W. Kirch, Aurora, of David W. Kirch, P.C.—(303) 671-7726, dkirch@dwkpc.net; Constance D. Smith, Denver, of Fairfield and Woods P.C.—(303) 894-4474, csmith@fwlaw.com
It appears possible to achieve a step-up in income tax basis in family trust assets at the death of the surviving spouse. There are a number of ways to achieve this result, and the best option will depend on the facts and circumstances.
Due to changes in both federal estate and income tax provisions, income tax implications should be more carefully considered in the process of estate planning. There has been substantial increase in the federal estate tax exemption (presently $5.43 million per taxpayer, doubled for married couples[1] ), and income tax laws have been changed to increase the tax rate on investment income and capital gains. An unintended result is that what was good traditional tax and estate planning 20 years ago may now create a bad income tax result.
The use of trusts (as opposed to outright bequests) to pass family wealth to the surviving spouse and children was designed to achieve a particular tax result. In the 1980s and 1990s, when the federal estate tax exemption was $600,000, it was common practice to create a family, credit shelter, or exemption equivalent trust that matched the exemption amount. The assets would escape the estate tax in the first estate because of the federal estate exemption and would escape tax in the estate of a surviving spouse because of the limited nature of her interest in the family trust assets. Assets included in a decedent's estate received a new basis equal to fair market value on death, but assets in the family trust were not stepped up. This kind of planning assumed that: (1) the federal estate tax exemption would remain fairly constant, (2) there would be a benefit in freeing the trust assets from estate tax in the second estate, and (3) the capital gains tax would stay low.
The federal estate tax exemption has since risen to $5.43 million, and assets, if they pass free of trust and go to the surviving spouse directly, are included in the taxable estate of the surviving spouse only to the extent they exceed $5.43 million (or more, if any unused exemption from the first death is added on).[2] The includable assets of the surviving spouse would also obtain the benefit of a step-up in income tax basis (assuming that general economic trends caused the assets to appreciate in value).
The Problem
Assume a typical case where the size of the combined assets of a husband and wife years ago was $1.2 million. The assets of the couple were divided and re-titled to reflect equal separate ownership by the husband and wife. The husband died, and his $600,000 estate went into a family trust for the benefit of the wife during her lifetime, with the remainder at her death going to the children. Over time, the value of the family trust assets increased to $2 million, and the value of the assets of the surviving spouse also increased to $2 million. Assume that the surviving spouse is still living and that the children are in a 25% income tax bracket...
To continue reading
Request your trial