This is a point I harp on frequently, most recently in my June 18, 2015 blog post. Click here for my earlier post, That is, if you are married make sure your core estate planning documents include a QTIP marital trust and a QTIPable by-pass trust for your surviving spouse. Do not use the well-worn credit shelter trust.
My primary point is for you to read the related income tax provisions in the 300-page February 2015 “General Explanation of the Administration’s Fiscal Year 2016 Revenue Proposals” (click here to see it). The specific proposal I address is on page 156. It, in my view, gives us yet another writing-on-the-wall that the bulk of us will at some point face an income tax at death on our date-of-death accrued gains rather than paying an estate tax. In other words, we will face an estate situation in large part similar to the income tax / estate system in Canada.
This is writing-on-the-wall, as I do not see this proposal being implemented in the immediately foreseeable future. But, it is coming.
For example, assume a person owns 1,000 shares of Apple stock at death with a cost basis of $50 per share. The Apple stock is now worth $120 per share on the date of the person’s death. In this example that person’s estate will pay income tax on the $70 capital gain rather than an estate tax [the $70 per share gain is the $120 per share current value less the $50 cost basis]. Keep in mind this is income tax on the gain even if the estate does not sell the stock.
There also is an important exception in this 2016 income tax-gain revenue proposal. This income tax gain requirement will not apply at the death of a spouse to the extent the property passes to the surviving spouse (or to a charity).
This means the best and most flexible degree of foresight for your core estate planning is to include a QTIP marital trust and a QTIPable by-pass trust that most likely will be treated favorably under this surviving spouse exception. I am willing to bet the farm that the tried-and-true credit shelter trust will not fall within this exception.
From a planning perspective I also see no downside to the use of the QTIP trust approach, even if I end up wrong about this move toward Canada.