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Estate planning and income tax rules have changed so community property gets a full step-up in basis and the surviving spouse’s property is not included.

Basis After the 2017 Tax Act—Important Before; Crucial Now

The 53rd Annual Heckerling Institute kicked off with a presentation by Howard M. Zaristsky, Esquire and Lester Law of Franklin Karibjanian Law with a detailed discussion on basis after the 2017 Tax Cuts and Jobs Act (the “Act”). Determining basis was important before the Act, but is crucial now.

The Act changed fundamentally both the estate and income tax rules. What was estate planning has now become a combination of income and estate planning. The presenters focused on the importance of basis and mechanisms involved in creating basis. Zaristsky joked that the unofficial title of the presentation should be “Finding Basis.”

Under IRC Section 1014, basis of property in the hand of a person acquiring it from a decedent or to whom the property passed from a decedent is the fair market value of the property at the date of the decedent’s death or the alternate valuation date if validly elected.

With the increased life-time exclusion and portability, the old tied-and-true planning of marital and credit shelter trusts need to be carefully reviewed.

Community property get a full step-up in basis for both sides of the community property at the death of the first spouse, even though the surviving spouse’s property is not included in the decedent’s gross estate for federal estate tax purposes. This means there is a step-up in basis at both deaths. Discussion included techniques for creating community property even though the state does not generally have community property. Alaska, Tennessee and South Dakota have enacted elect-in community property regimes, in which a married couple may elect to have some or all the property acquired during marriage become community property. Zaristsky stressed the importance of maintaining community property status upon moving from a community property state.

The availability of portability of the deceased spouse’s unused unified credit amount only increases the importance of basis planning in marital deduction planning.

If the credit shelter trust is still utilized, there are planning mechanisms to obtain a step-up in basis of the credit shelter trust assets upon the death of the second spouse. The presenters’ discussion went into the details on the following mechanisms that could be used to get basis step-up on the second spouse’s death:

  • An independent trustee’s power to distribute assets to the surviving spouse;
  • Contingent general power of appointment which would pull the assets back into the surviving spouse’s estate;
  • Trust protector with the ability to create a general power of appointment; and/or
  • Delaware tax trap.

The session went into several other techniques that utilize exemption amounts in order to receive a step-up in basis, which, without planning, would not be possible.

The most important take away is that, from a tax perspective, estate and income tax planning for basis is now one of the most important planning issues in estate planning.

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Marie Arrigo is a Tax Partner and Co-Leader of the Family Office Services Practice for the Personal Wealth Advisors Group which provides tax consulting and compliance services to family offices, individuals, trusts and estates, and closely held businesses.

Patricia Green is a Tax Director with over 30 years of experience in providing services to small businesses, individuals and estates. She has expertise in tax compliance, estate and gift tax, wealth transfer, and succession planning.