United States: Fix Your Obsolete Estate Plan

Published in Business NH Magazine (11/2/18)

The Tax Cuts and Jobs Act of 2017 can mean good news for folks standing to inherit property.  Until recently, many people used various estate planning techniques to postpone or avoid the 40% Federal estate tax.  However, as a tradeoff, many of these plans can result in beneficiaries receiving property that is subject to capital gains when sold.  Now that a  taxpayer's lifetime estate, gift and generation skipping transfer tax exemption is more than  $11 million, most people should no longer need fear (and thus plan for) transfer taxes and can fix obsolete estate plans or create new ones to reduce the capital gains burden on heirs and beneficiaries.  In additional, many revocable trusts created by married couples provide that separate shares are created to avoid estate taxation at the death of the first spouse. Many of these assets that are transferred when a spouse dies will not receive a "step up" in tax basis (the readjustment of the value of an appreciated asset for tax purposes) when the second spouse passes because these assets are not part of their gross taxable estate.  This strategy made sense when the decedent's gross estate was larger than the lifetime exemption amount.  However, that may no longer be the case with a lifetime exemption of more than $11 million.

Revocable trusts can be amended to provide more flexibility to the trustee/executor to adjust for future estate/income tax considerations when a spouse dies. In addition, many revocable trusts created and funded years ago can be easily modified or terminated to provide for estate inclusion at the death of the grantor or of a beneficiary. 

Making adjustments

Because the "step-up" in basis may now be accomplished with little concern for transfer taxes, seeking ways to create estate tax inclusion has become an integral part of today's planning process.  One of the first steps is trying to assess the potential transfer tax costs against the income tax savings that would arise from a step-up.

Most people are in a "free base" situation.  That is, the person's assets are less than his or her lifetime exemption(s).  In these situations, tax basis planning is often a primary component of an estate plan.

For example, in 1998, John died, leaving commercial real estate in a credit shelter trust for the benefit of his wife, Mary, and their children.  By 2018, the commercial real estate appreciated in value to $5,000,000, but John has a low, depreciated tax basis under $200,000.  Upon Mary's death, the asset will be transferred to their children, none of whom has an interest in owning the real estate.  Unfortunately, the sale would generate over $4,800,000 in taxable capital gain.

However, Mary, having less than $1,000,000 in personal assets, has more than $9,000,000 of remaining lifetime exemption, putting her in a "free base" situation.  This family may wish to consider terminating the trust and distributing the real estate to Mary, or employ a technique to modify the trust to achieve a "step-up" in basis and eliminate $4,800,000 or more of capital gain on the subsequent sale of the appreciated real estate.

Dealing with larger estates

Others may be somewhat in the middle, with combined estates (if married) of between $10 million and $20 million.  Here it gets a bit trickier.  These estates may end up owing federal estate taxes.  The historically large lifetime exemption now in place is scheduled to "sunset" at the end of 2025, essentially cutting it in half.   Moreover, many pundits believe that Congress may give the federal estate tax yet another overhaul prior to 2025.  For these folks, planning with maximum flexibility during one's lifetime and allowing post-mortem tax planning makes sense.

For example, Jane worked for decades to build a catering business.  Through  careful management and long nights and weekends, she built a thriving business she intends to sell in the next five years.   As a component of her business succession plan, Jane wishes to begin gifting appreciated non-voting interests in her LLC to her children to freeze the value for estate tax purposes.  However, instead of gifting non-voting interests directly in trust for the benefit of her children, she creates an irrevocable grantor trust for the benefit of her elderly mother. The trust is designed such that upon the death of her mother, the interests are distributed in trust for the benefit of her children.   The trust is designed such that the appreciated assets in the trust are "stepped-up" at the death of Jane's mother, saving both estate taxes at the death of Jane and income taxation on the sale of appreciated assets.

Those couples or individuals who have larger estates in excess of lifetime exemptions can also benefit from both transfer and income tax efficient advanced planning techniques.

For example, in 2010, Peter funded an irrevocable grantor trust for the benefit of his children with $2,500,000 in cash. The trustee of the trust invested in a portfolio of aggressive growth stocks in anticipation of the recovery from the recession.  The risk paid off.  By 2018, the portfolio grew to more than $10,000,000.  Peter is suffering from declining health and wishes to find a way to avoid capital gain recognition when the portfolio is distributed to his children and sold following his death. As with most grantor trusts, Peter retained the power to swap assets of equivalent value with the trustee.  Peter may consider swapping high basis assets such as bonds, other fixed income investments or life insurance for the appreciated portfolio. The appreciated assets, now in his gross estate for transfer tax purposes, will be stepped-up at his death, eliminating or significantly reducing the gain recognized when the securities are subsequently sold.

Change is Always Out There

It is important to remember that things change.  The federal transfer tax regime has been overhauled three times in the past 18 years.  It is a safe bet that it will be again.  The step -up in tax basis may be on the endangered species list.  In his 2012 State of the Union speech, President Barack Obama referred to the "step-up" as the "the single largest loophole in the entire individual income-tax code".  Former Vice President Joe Biden recently proposed taxing appreciated assets at death as a way to pay for free college tuition, eliminating the step-up loophole.

No one has a crystal ball. Establishing an estate and succession plan with such uncertainty requires careful analysis and, most importantly, flexibility.  What worked in 2000 or 2012 may no longer.  Now is a good time for a check-up, especially for  those who have previously funded irrevocable trusts with now appreciated assets, or married couples with existing revocable trusts more than a few years old.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions