Day Pitney’s Approach to Planning for Income Tax Basis Step Up

Day Pitney writes about a technique they are implementing to obtain a step up in basis for assets conveyed in trust for married clients, the contingent general power of appointment.

After noting the significant benefits of using trusts in estate planning, it notes that one limitation of trusts is that trust property is ordinarily not eligible for a “step-up” in basis at a beneficiary’s death.

Property owned outright, on the other hand, does get a “step-up” in basis at death, which eliminates capital gains tax on any gains to that point. In the current tax environment of lower estate and gift tax rates coupled with higher income tax rates, this would seem to present an “either/or” choice – take advantage of the trust structure or give up the opportunity for capital gains tax relief afforded by the basis step-up rules.

Day Pitney continues to state that “by taking creative advantage of well-established tax principles, we have developed an innovative solution that avoids this “either/or” choice. Our solution is to include a new provision in trust agreements called the “contingent general power of appointment,” or CGP. The CGP causes trust property to be included in a beneficiary’s taxable estate at death in order to qualify for a step-up in basis, as long as that will not cause any increase in estate tax. The result – trust property with previously unrealized capital gains can be sold with no capital gains tax liability.”

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Posted by Lewis J. Saret, Co-General Editor, Wealth Strategies Journal.