Attorneys routinely get themselves in trouble by dabbling in practice areas about which they know little. Estate Planning and Elder Law are complicated areas with much to stay on top of. 2010 is a great example of that. The rules have changed completely and there is much uncertainty. There is no estate tax. But, the basis “step-up,” long a mainstay of Estate Planning, has been replaced, temporarily, by a carryover basis regime. It’s enough to make even dedicated estate planners heads’ spin!
Let’s look at a couple with $2 million in zero basis assets, all owned by the wife. She is on her death bed and will die in 2010. What would you advise them to do? A “dabbler” might either tell her to 1) put all her assets in a bypass trust (because there is no estate tax in 2010), or 2) send all the assets to her husband. The first strategy could be problematic from an income tax basis perspective. The wife’s executor could only allocate $1.3 million of basis increase to the bypass trust. Thus, the bypass trust would have $2 million in assets and a $1.3 million income tax basis. The second strategy could be problematic from an estate tax perspective. Assuming the surviving husband will live into 2011, the current estate tax law provides for only a $1 million applicable exclusion. Thus, at the survivor’s later death, their heirs would face a tax of $435,000 on the balance of the $2 million inheritance.
Perhaps the best result would be a third option. Leave $1.3 million of assets to the bypass trust to which the executor could allocate $1.3 million of basis increase. Leave the remaining $700,000 to the surviving spouse. The surviving spouse qualifies for an additional basis increase of up to $3 million. So, with this third option, the surviving spouse ends up with $700,000 with a fair market value basis and does not have a taxable estate.
What would you do?
Stephen C. Hartnett, J.D., LL.M.
Associate Director of Education
American Academy of Estate Planning Attorneys