New Tax Basis Rules In Estate And Elder Law Planning

The tax law changes that became effective on January 1, 2010 and affect estate and elder law planning are as follows. These changes include the possible elimination of the stepped-up tax basis for assets in irrevocable trusts and life estates, the repeal of the federal estate tax and the allocation of basis increase by the Executor.

A.      New Internal Revenue Code (IRC) Section 1022, which replaces former IRC Section 1014, limits the increase, or step-up, in basis, available on death.  New Section 1022 limits the increased basis allocation to property acquired from a decedent, revocable trusts, jointly held property and community property.  Some attorneys interpret Section 1022 to deny any allocation of basis increase (or step-up) for life estates, irrevocable trusts and powers of appointment.  Others interpret it to provide that only certain irrevocable grantor trusts and life estates may be entitled to an increased basis allocation (or step-up).  Moreover, the increased basis allocation under the new law is limited to 1.3 million dollars, plus an additional 3 million dollars for qualified spousal property.

B.      The federal estate tax is eliminated under the new rules for this year (2010) only.  In 2011, the federal estate tax is reinstated, with only a one million dollar exemption. The repeal of the federal estate tax for 2010 could hurt a surviving spouse where a decedent whose documents contained an “exemption equivalent” or “credit shelter” trust dies in 2010, because the wording of the documents may leave all the assets to the trust, possibly cutting out the surviving spouse.

Source: New York State Bar Elder Law Section Bulletin