What is the name of your state? Texas
Since tax laws keep changing, it's hard to know when you might need a step-up in basis as opposed to a reduction in the size of your estate. I'm considering the following plan for a client in order to allow as much flexibility and creditor protection as possible without getting into IDGT's with promissory notes and asset swaps, etc.
The 3 big concerns are creditors, income tax and estate tax.
T leaves all assets in a testamentary trust, naming his child, C, as the trustee. Trustee may, in his discretion, pay trust principal and income to C for HEMS. This does not create a general power of appointment in C, and so the assets are protected from his creditors and will not be treated as part of his estate for tax purposes.
The trust can give C the following 2 different powers of appointment:
1. A limited power, during his lifetime, to appoint trust property and income to anyone he wants, except that he cannot appoint anything to himself, his creditors, his estate or his estate's creditors. (This limited POA will not cause inclusion in C's estate, nor expose property to his creditors)
2. A testamentary power to appoint trust property and income to anyone, conditioned on the making of a provision in his will which expressly states the testamentary general power of appointment is being exercised. If the power is not exercised, then the trust goes to C's descendants upon C's death. (This general POA will cause inclusion in C's estate*)
* The only property to be included in C's estate will be that over which he has a general POA at the time of his death. Also, under Texas law (and maybe other states), our Uniform Trust Code Section 112.035 states that a beneficiary's creditors cannot attach trust property merely because the beneficiary has or exercises a testamentary power of appointment.
This combination could work, couldn't it? C could rock along and see what happens as he gets older. Maybe he gets a lot richer; maybe he becomes poor. Maybe the estate tax is repealed, or maybe the exemption is lowered back to $5 million. Maybe the capital gains tax is repealed. Who knows?
All the while, none of C's creditors, or the creditors of any of C's descendants, will ever get to the trust while it continues to exist. (Trust creditors will always be able to get to trust property, so it's not a perfect world, for sure.)
Whatever the case, once C exercises the limited POA during his life, the property will belong to his kids, and it will not be included in the value of his taxable estate. He can go this route if there is a looming estate tax concern. The kids will not receive a step-up on those items, but estate taxes (almost certainly) will have been avoided.
Whatever trust property he doesn't give to his kids during life will be included in the gross value of his estate. It will receive a step-up.
So... he can dump the low-appreciation assets to his kids during life, right before his death. He can retain the valuable property with a low basis.** Since he has a general POA over just the retained property at the time of his death, it will get a step up.
** including both appreciated property and valuable property with a depreciated basis, so it can be depreciated all over again.
Basically, C can decide how much of which property goes where, in order to custom tailor his plan in whatever way works best at whatever time he needs to be "locked in."
No IDGT swaps and promissory notes to deal with. No questionable tactics, like appointing "trust protectors" who could be considered as people not having an adverse interest, etc. The plan above seems to be straight-up textbook, but I've never seen it proposed. I ran it by a Wills & Estate professor and a CPA who works on estates. Both stated it looks like the plan would accomplish the 3 purposes.
Does anyone have any thoughts on this? Any pitfalls you can see?
Since tax laws keep changing, it's hard to know when you might need a step-up in basis as opposed to a reduction in the size of your estate. I'm considering the following plan for a client in order to allow as much flexibility and creditor protection as possible without getting into IDGT's with promissory notes and asset swaps, etc.
The 3 big concerns are creditors, income tax and estate tax.
T leaves all assets in a testamentary trust, naming his child, C, as the trustee. Trustee may, in his discretion, pay trust principal and income to C for HEMS. This does not create a general power of appointment in C, and so the assets are protected from his creditors and will not be treated as part of his estate for tax purposes.
The trust can give C the following 2 different powers of appointment:
1. A limited power, during his lifetime, to appoint trust property and income to anyone he wants, except that he cannot appoint anything to himself, his creditors, his estate or his estate's creditors. (This limited POA will not cause inclusion in C's estate, nor expose property to his creditors)
2. A testamentary power to appoint trust property and income to anyone, conditioned on the making of a provision in his will which expressly states the testamentary general power of appointment is being exercised. If the power is not exercised, then the trust goes to C's descendants upon C's death. (This general POA will cause inclusion in C's estate*)
* The only property to be included in C's estate will be that over which he has a general POA at the time of his death. Also, under Texas law (and maybe other states), our Uniform Trust Code Section 112.035 states that a beneficiary's creditors cannot attach trust property merely because the beneficiary has or exercises a testamentary power of appointment.
This combination could work, couldn't it? C could rock along and see what happens as he gets older. Maybe he gets a lot richer; maybe he becomes poor. Maybe the estate tax is repealed, or maybe the exemption is lowered back to $5 million. Maybe the capital gains tax is repealed. Who knows?
All the while, none of C's creditors, or the creditors of any of C's descendants, will ever get to the trust while it continues to exist. (Trust creditors will always be able to get to trust property, so it's not a perfect world, for sure.)
Whatever the case, once C exercises the limited POA during his life, the property will belong to his kids, and it will not be included in the value of his taxable estate. He can go this route if there is a looming estate tax concern. The kids will not receive a step-up on those items, but estate taxes (almost certainly) will have been avoided.
Whatever trust property he doesn't give to his kids during life will be included in the gross value of his estate. It will receive a step-up.
So... he can dump the low-appreciation assets to his kids during life, right before his death. He can retain the valuable property with a low basis.** Since he has a general POA over just the retained property at the time of his death, it will get a step up.
** including both appreciated property and valuable property with a depreciated basis, so it can be depreciated all over again.
Basically, C can decide how much of which property goes where, in order to custom tailor his plan in whatever way works best at whatever time he needs to be "locked in."
No IDGT swaps and promissory notes to deal with. No questionable tactics, like appointing "trust protectors" who could be considered as people not having an adverse interest, etc. The plan above seems to be straight-up textbook, but I've never seen it proposed. I ran it by a Wills & Estate professor and a CPA who works on estates. Both stated it looks like the plan would accomplish the 3 purposes.
Does anyone have any thoughts on this? Any pitfalls you can see?
