By Steven J. Oshins, Esq., AEP (Distinguished)

The federal estate and gift tax exemption is at an all-time high.  In fact, it’s so high that very few people would owe any federal estate tax if they were to die today.  Therefore, almost everybody dies leaving unused estate tax exemption on the table.

Estate Tax Exemption as Currency

Dollar, Euro, Yen, Pound, Franc, Peso, Estate Tax Exemption!  Yes, Estate Tax Exemption!

Estate Tax Exemption is a form of currency.  However, unlike the other currencies, if you don’t use it during your lifetime you can’t pass it to your heirs (other than portability to a spouse).  But how can we use it when the decedent has a small estate?

General Power of Appointment

A General Power of Appointment (“GPOA”) is a power to appoint to yourself, your estate, your creditors or the creditors of your estate.  Under IRC Section 2041, if you have a power to appoint to any one or more of the above, then those assets are includible in your estate for estate tax purposes.

If those assets are includible in your estate for estate tax purposes, then they get a new income tax basis equal to fair market value as of the date of death.  This can be a step up in basis if the value is greater than the previous basis or a step down in basis if the value is less than the previous basis.

Therefore, we can strategically include older permissible beneficiaries in a gift trust and give the first of them to die a carefully-drafted GPOA over certain assets.

Basis Bump Planning

We only want step-ups in basis, not step-downs.  And we want to obtain them as soon as possible.

Therefore, we design a formula GPOA to give the first to die of a group of discretionary beneficiaries a formula GPOA that can be as complex or as simple as you want to design it.

For example, the GPOA might apply to all trust assets that have a fair market value in excess of their income tax basis, but limited such that the powerholder would owe no federal or state estate tax.  If you want to make it more complex, then you might have it first apply to certain assets such as depreciated rental properties over other assets with long-term capital gain and/or you might apply it first to certain assets that the family will soon sell rather than assets that will be held for a long, long time.

Grandma and Grandpa

If you add the client’s grandparents and parents in to a discretionary children’s trust and give the first to die a formula GPOA as described above, especially if there is at least one elderly grandparent with a small estate, then you might strategically gift low basis assets to the trust rather than the traditional high basis gifting given that the new basis will likely be obtained decades before the client will pass away.

After years of Grandma and Grandpa making gifts to the family, this may be their greatest gift of all!

Numerical Example

Assume that Client gifts to assets to an irrevocable gift trust primarily intended for Client’s spouse and descendants.  Attorney suggests Basic Bump Planning and adds Client’s parents and grandparents as discretionary beneficiaries and gives the first to die a formula GPOA, but only over assets with a basis lower than fair market value at the powerholder’s death.

Grandma dies.  There are two trust assets.  Asset #1 has a basis of zero and a fair market value of $5 million.  Asset #2 has a basis of $5 million and a fair market value of $1.

Grandma’s GPOA only applies to Asset #1.  Therefore, there is a $5 million basis step-up applied to Asset #1, but no basis step-down applied to Asset #2.  Thus, Asset #2 can still be sold for $1 to create roughly a $5 million tax loss!

What a great plan!  Yet, almost nobody thinks to do this.  It’s time to add this to your planning.  Your clients will love you.

Silence

The law doesn’t require anyone to even tell them that they have this power.  Therefore, they likely won’t actually exercise the power unless you have a reason for them to do so and actually ask them to do so.  Regardless, a GPOA can be drafted so that it requires a non-adverse party such as the client’s best friend to have to approve it in writing for it to actually be exercised.

Theoretically, the client’s best friend can be this non-adverse party and likely won’t approve an attempted exercise.

Summary

Basis Bump Planning is a spectacular, yet underused, strategy.  It’s a good time to consider adding it to your repertoire if you’re an estate planner.

RELATED EDUCATION

If you found this article interesting, you might also be interested in these other educational programs and products by Steve Oshins:

• The Spousal Lifetime Access Trust: A Gifting and Creditor Protection Technique
• Estate Planning Techniques in a Time of Low Interest Rates
• The Installment Sale to an Intentionally Defective Grantor Trust
• The Grantor Retained Annuity Trust: Significant Estate Tax Savings with Nearly Zero Gift Tax Risk
• Steve’s FREE State Rankings Charts

ABOUT THE AUTHOR

Steven J. Oshins, Esq., AEP (Distinguished)  is a member of the Law Offices of Oshins & Associates, LLC in Las Vegas, Nevada. He was inducted into the NAEPC Estate Planning Hall of Fame® in 2011.  He has been named one of the 24 “Elite Estate Planning Attorneys” and the “Top Estate Planning Attorney of 2018” by The Wealth Advisor and one of the Top 100 Attorneys in Worth. He is listed in The Best Lawyers in America® which also named him Las Vegas Trusts and Estates/Tax Law Lawyer of the Year in 2012, 2015, 2016, 2018, 2020 and 2022.  He can be reached at 702-341-6000, ext. 2, at soshins@oshins.com or at his firm’s website, www.oshins.com.