Basis Issues for Trusts and Estates: Form 8971, Removing Assets From Trusts, Upstream Gifting, Substantiating Basis

Description

Basis--capital investment in property for tax purposes--is key to calculating gain or loss on property disposition. The changes in estate tax rules and exemption amounts, along with the vulnerability of the date of death step-up after the election, make planning difficult but still doable. For estate plans, flexibility is paramount; proper basis planning can drastically lower the tax liability of taxpayers and their beneficiaries.

The landscape of basis planning changed from lowering asset values (reducing estate tax) to increasing asset values and obtaining the Section 1014 step-up (reducing income tax) when the estate tax exemption was increased to $11.58 million ($23.16 for married taxpayers). Rather than removing assets from an estate, advisers are planning for estate inclusion.

There is a disparity in the treatment of basis for assets that are transferred by gift (donor's basis is retained) and at death (stepped-up to fair market value). Years after funding a trust, a taxpayer may decide that appreciated assets need to be removed to obtain the tax-saving step-up.

Usually, assets are transferred downstream to younger generations. Upstream gifting takes place when, for example, the property is gifted to a parent by a child. The older family member can return the same asset to the younger generation at death but with a substantially higher tax basis.

Tax advisers' recurring responsibility is to determine (or assist taxpayers in determining) tax basis in assets held or sold. Appraisals are ideal. On the other end of the spectrum, tax practitioners are familiar with Cohan v. Comr., 39 F.23 540, allowing estimates when records do not exist. Understanding how to substantiate basis is critical for estate tax practitioners.

Listen as our panel of trust and estate tax experts walks you through handling current and recurring basis issues. Our experts will explain how to structure estate plans to ensure flexibility and minimize transfer and income taxes for taxpayers and their heirs.