Are You Giving Your Heirs an Unanticipated Tax Bill?

The changes brought by the 2017 Tax Act made it so that many clients did not have to worry about the estate tax as the exemption was dramatically increased. However, if an estate plan remains in place that directs assets to a credit shelter trust, unnecessary capital gains tax may be owed. The reason is that the income tax basis of the assets held in a the trust is not stepped up in value at the death of the second spouse because the assets are not included in that spouse’s estate.

The challenge  is to move assets out of the credit shelter trust and into the survivor’s estate to obtain the income tax-saving step-up when the survivor dies. Even though originally credit shelter trusts are irrevocable, many states have acknowledged changed circumstances that make some trusts impractical, outdated or exposed to unanticipated taxation. New state laws are here to help that.

Terminating a non-charitable irrevocable can be accomplished without court approval, so long as there is consent of the trustee and all beneficiaries, and provided the termination is not inconsistent with a material purpose of the trust. As the purpose was to reduce taxes, terminating would align with that goal. Modifying and decanting the trust may also be avenues to pursue. Decanting a trust means that the trustee directs the trust property to a new trust that contains different terms from the original trust but provide the same protections.

See Nancy S. Hearne, Are You Giving Your Heirs an Unanticipated Tax Bill?, Saul.com, March 1, 2019.

Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.) for bringing this article to my attention.