The beginning of 2013 has been an interesting period, as we have seen significant planning for clients with complex and taxable estates. Some of our clients, like many Americans, will only discover the effects, and perhaps horrors, of the new tax law, the 2013 inaptly named “American Taxpayer Relief Act”, after they see their 2013 tax returns in April or later in the year. Much of our planning involves using trusts as a tool for planning and transferring wealth. As discussed in a recent WSJ Wealth Advisor article, some advisors are now suggesting that their clients give their property away at death rather than making lifetime gifts. Lifetime gifting was important in 2012, as we came up against the “Taxeggedon” deadline, when it appeared that the $5 million “unified credit” exemption would disappear. For many of our clients, we completed lifetime gifting different types of property in such a way to ensure a gift was “completed” for IRS/tax purposes, but which allowed our clients to retain control of the property. The basis for the new advice is that when property is gifted at death, rather than as a lifetime gift, the “basis” of the value of the gift in the hands of the donee/beneficiary is the fair market value of the property on the date of the donor’s death. If Blackacre is worth $5 million but it was purchased for $1 million, it would have a $1 million basis if given away during the owner’s life. Once it was sold, say for the $5 million FMV, then the gain would be taxable to the donee. If the property is given at death and then sold for $5 million then the donee realizes no gain and instead retains the entire value as a death gift. The analysis of the tax effect of a gift is something that good advisors and attorneys consider. A current best practice in trust planning is to give the trustee the power to make trust distributions at death so that the recipient can use this “date of death step up in basis”. Clients should develop a long term relationship with trusted advisors who stay current on the law and best practices, to ensure that their advisors are presenting comprehensive solutions.
