Basis Planning with Gifting and Irrevocable Trusts

This presentation discusses gift planning with irrevocable trusts and how the trusts can be structured so the assets still get a step-up in basis. The trusts grant a power of appointment and allow for this step-up on the power holder's passing.

1. Basis Planning with Gifting and Irrevocable Trusts P. Haans Mulder, JD, MST, MBA, CAP ® , CFP ® Cunningham Dalman, P.C. [email protected] [phone] Serving West Michigan since 1900

2. Overview Basis Planning Basis Planning with Medicaid Planning Basis Planning with Business and Cottage Succession Planning Basis Planning with Estate Tax Planning Serving West Michigan since 1900

3. Basis Planning Gifting to a child or person results in a carry-over basis (Code Section 1015(a)) There’s no step-up on the donor’s passing This basis problem can be fixed by gifting the asset to an irrevocable trust Serving West Michigan since 1900

4. Basis Planning A trust can give a person a power of appointment This is a right to direct the assets during the person’s life or at death (i.e. testamentary) A testamentary power of appointment is exercised in a last will and testament Serving West Michigan since 1900

5. Basis Planning Code Section 2041 addresses powers of appointment A general power of appointment is a power a person can exercise in him/herself, creditors of him/herself, his/her estate, creditors of him/her estate Serving West Michigan since 1900

6. Basis Planning A general power of appointment causes the assets subject to the power to be includable in the power holder’s gross estate Code Section 1014(b)(4) allows assets subject to this power to receive a step-up on the power holder’s passing Serving West Michigan since 1900

7. Basis Planning Give the grantor of the trust this power of appointment so the assets in the trust get a step-up at the grantor’s passing Give another person a power of appointment so the assets get a step-up at the person’s passing (“upstream basis planning”) Serving West Michigan since 1900

8. Medicaid Planning Assets can be protected if they’re gifted outside the five-year lookback period This could apply to a house, cottage, rental property, brokerage account, or ownership in LLC or corporation Serving West Michigan since 1900

9. Medicaid Planning For clients who are doing Medicaid planning, they won’t have taxable estates Gift the asset to an irrevocable trust and give the grantor a general power of appointment so the assets receive a step-up in basis on the grantor’s passing Serving West Michigan since 1900

10. Succession Planning Don’t gift the asset directly to the child or the next generation Create a trust for the child and gift the asset to that trust This could include ownership in a business or a cottage Serving West Michigan since 1900

11. Succession Planning If the current owner of the business or cottage isn’t likely to have an estate tax issue, give him/her a general power of appointment The business ownership or cottage will get a step-up in basis on the owner’s passing Serving West Michigan since 1900

12. Estate Tax Planning This planning often uses a spousal limited access trust (“SLAT”) This involves gifting to a trust that’s for the benefit of the grantor’s spouse It uses lifetime gift exemption and gets assets out of the grantor’s estate Serving West Michigan since 1900

13. Estate Tax Planning Unfortunately, these assets won’t get a step-up in basis on either spouse’s passing Incorporate “upstream basis” planning Give an elderly parent or sibling a testamentary general power of appointment Serving West Michigan since 1900

14. Estate Tax Planning This is ideal when the parent or sibling is of modest wealth and won’t have a taxable estate Upon the parent or sibling’s passing, the assets in the trust will get a step-up to the extent of the person’s unused estate tax exemption Serving West Michigan since 1900

15. Estate Tax Planning Use basis planning for a family or B trust (i.e. a trust for the benefit of the surviving spouse and shelters the assets from estate taxes) These assets generally won’t get a second step-up on the surviving spouse’s passing Serving West Michigan since 1900

16. Estate Tax Planning Decant the family trust or have it modified with the approval of the probate court to include a general power of appointment If the surviving spouse has unused exemption, the assets will get a second step-up Serving West Michigan since 1900

17. Thank You! P. Haans Mulder, JD, MST, MBA, CAP ® , CFP ® Cunningham Dalman, P.C. [email protected] [phone] Serving West Michigan since 1900