By: Les Raatz

In last week’s Tax Tip our Henry Grix succinctly described the current lay of the land regarding estate tax repeal.  This Tax Tip focuses on one narrow but very important aspect in anticipating such action, or possible delayed or lack of action – that of basis step-up of assets owned by a decedent.  The most recently passed House bill (re-introduced as the Death Tax Repeal Act of 2017) would completely repeal the estate tax.  It would also cause the basis of assets owned or deemed owned by the decedent to be stepped up to fair market value (step-up) as is permitted under current law, instead of retaining the old basis (carry-over basis).  President Trump’s pre-election proposal had permitted step-up in basis on up to $10 million of a decedent’s assets, but above that amount there would be carry-over basis, or, perhaps, capital gain on death.

So hedging of bets is the advice of the day.  Potentially millions of dollars may be at stake for children of wealthy parents.

Many parents desire to make irrevocable gifts to descendants, and many are doing so anticipating that the assets gifted will appreciate in value.  One motivation is to avoid an increased 40% estate tax on the subsequent appreciation if repeal does not occur or if passed is subsequently reinstated.  However, the cost of gifting assets during lifetime is that the basis in assets is not stepped-up, so the children’s sale of the assets will generate income tax on appreciation when the assets are subsequently sold that would not occur of the assets were retained by the parent until death.  So the hard choice may be between avoiding estate tax or avoiding increased capital gain tax, but perhaps not avoiding both. 

Is there a way, at the time of the gift, to ride both horses and later chose the best saddle that avoids both taxes once the rules become known?  Likely, yes.  If a lifetime gift is made, it could be in a trust for the benefit of descendants, and the trust terms are drafted to avoid inclusion of the estate of the parent.  But added to the trust agreement is the flexibility to cause trust assets to be deemed included in the estate of the parent at the parent’s death if doing so will not generate an estate tax due to repeal AND basis step-up results. 


For more information, please contact Les Raatz in the Phoenix office at 602-285-5022.