A Family Asset Protection Checklist (in pdf format)

The threat of uninsured risks includes, for example, old-age incapacity, predatory elderly remarriages, nursing home care, asset protection, divorce by our children, personal guarantees, bankruptcy.

This blog post includes my memo (link is below) for a family’s asset protection checklist.  Please forward a copy to your family members, friends and neighbors.

Click here for a pdf copy of my memo.

Upstream Gifts to Your Parents. Potentially Significant Income (Estate) Tax Savings

This blog post is about the income tax benefit of you making gifts upwards (or upstream) to your older parents so that the gifted property will be includible in your parents’ estates at their death. This also is especially effective for depreciable property (as I illustrate below).

The key point is the property has to be includible in your parents’ estates for estate tax purposes.  But, here is the beauty of this income tax planning: this stepped-up FMV basis occurs even if your parents pay no estate tax.  Death makes the income tax gain disappear.

As to the income tax stepped-up basis, investment assets like marketable securities and other assets such as art, collectibles, and depreciable property get a new, fresh, FMV stepped-up cost basis.

Stock Shares Example.  Assume you purchased ABC stock shares 15 years ago for $100 per share. The shares are now each worth $1,000. If you sell these shares, you face a $900 gain for income tax purposes on each share. But, if your parents die owning these shares as part of their estate, the recipient as beneficiary of the shares gets to use a new cost-basis equal to the FMV of the shares at the time of your parents’ death. A step-up to the $1,000 FMV as of the date of death.

In this example the recipient turns around and can sell the ABC shares at the new $1,000 FMV cost-basis and face no income tax.  No $900 gain.

Depreciable Property Example.  Here is an even more powerful example with depreciable real estate.

Assume you own an almost fully-depreciated rental building with a FMV of $500,000 (excluding the land value), but with a low adjusted cost-basis of $40,000 due to you having claimed depreciation deductions.  You claimed $460,000 depreciation tax deductions throughout the years.  If you sell the building now, you will trigger a $460,000 income tax gain, with possible ordinary income recapture.

By contrast, the FMV value at death transforms the building’s depreciable cost-basis to its $500,000 FMV, without depreciation recapture.  The beneficiary of the building can, again, begin depreciating the building using its new $500,000 basis.  This produces, effectively, a powerful, double income tax benefit.

Is this simple or complex planning?

This upstream planning can include simple, annual-exclusion gifts, as well as greater complexity, for example, using the remainder gift of a zeroed-out GRAT, etc.  And, for a greater degree of asset protection and added flexibility, the use of an inter-vivos QTIP trust for your parents.

Another possible planning feature, although not essential, is your parents thereafter can allocate GST exemption to the property, using a trust in a way that prevents the property (and any appreciation) from being later includible in your estate.

One forewarning.  Keep Internal Revenue Code Section 1014(e) on your checklist so as to plan purposely to prevent the gifted property from moving back within one year of the gift into your hands at your parents’ deaths.  Such as if a daughter gifts the property to her parents and receives the property back within one year from her parents at their death.

This Section 1014(e) tax law denies the FMV basis step-up for certain one-year situations.  Ideal tax planning is generally always better sooner than later.

My recent email alert, titled “The Sky is Really Falling”

Click here for my July 9, 2014 email alert.   I am aware this still-early stage of everyone digesting the new income tax paradigm for estate planning may make my repeated concerns about this income tax exposure seem like nothing more than an acorn dropping.   But, the reality is the sky is really falling for a failure to address this income tax exposure as part of core estate planning.