Ever Been Told To Get Your Trust Reviewed?

For a couple of decade’s estate planning attorneys have used irrevocable Bypass trusts to implement estate tax planning.  The Bypass or “B” trust could be used to meet IRS guidelines while assuring that a surviving spouse was properly supported and at the same time guaranteeing that what remained went to children.  For much of this time the exemption from estate tax was extremely low and therefore compelled the use of an irrevocable Bypass Trust.

Since 2013 the exemption from estate tax has climbed and currently $5,450,000.00 per person, meaning that a couple can pass a combined $10,900,000.00 before paying an estate tax. Congress has also tagged on a cost of living rider so the exemption will continue to rise into the future.  Additionally, for the first time ever Congress now allows couples to transfer any unused exemption amount to the surviving spouse – this transfer is known as “portability” and must be claimed on the deceased spouse’s estate tax return even if the return would not otherwise be required.  The combination of the high estate tax exemption and the portability aspect has changed the focus of estate planning and opened the door for a better income tax result.

Get Your Trust Reviewed

If your trust was prepared before 2013 then you should get it reviewed and here is why:  When property is inherited (first by your spouse, then by the kids) there is a new income tax basis allowed for capital assets at the fair market value on date of death.  Capital assets are assets that if held for a year would qualify for capital gain treatment like real estate, stock investments, and closely held businesses.  Resetting the tax basis is huge.  Additionally a new tax basis can occur again when property is passed from the surviving spouse to the kids.  HOWEVER, the Bypass Trust does not qualify for the “basis step up” and must be re-vamped in order to reposition the estate correctly.  Bottom line: Get a checkup.

Irrevocable Trusts or Not

In the past it used to be a no brainer to use the Bypass Trust which not only protected against the estate tax but also guaranteed inheritance to the kids, as the “irrevocable” nature of the trust does not allow the inheritance to be changed by the surviving spouse.  But with the stroke of the Congressional pen what used to be good is now less so.

Couples now have a choice in whether to use the irrevocable trust structure or not.  If a couple chooses to stay with the irrevocable trust then a different type of irrevocable trust is required in order to qualify for the basis step up when the kids inherit and to guarantee that the kids get an inheritance.  Most people want both the guarantee and the basis increase.

Couples that are not concerned with the inheritance guarantees of an irrevocable trust should still be eliminating the old style Bypass in favor of the tax basis increase to the kids.

What Does “Basis Step Up” Mean

Suppose you invested $100,000.00 in real estate and that investment is now worth $2,000,000.00.  If you sell the real estate you now have $1,900,000 of gain that subject to income tax.  But if that same investment, instead of being sold is inherited, the beneficiary will receive the real estate with a new “basis step up” at $2,000,000.00 and they can then sell it at that amount with no income taxation. Even if the property is not sold, the beneficiary will get a new depreciation schedule which offsets the rental income;  a very nice deal indeed.

Larger Estates

For estates exceeding $11,000,000.00 (or $5,450,000 for singles) the analysis changes again but is beyond the scope of this article.


There are so many important reasons to stay on top of your estate planning, it is impossible to list them all here. Do your family a favor and get your trust reviewed to make sure that you are taking advantage of all that the law allows with regards to tax planning and that your trust does what it is supposed to do.  Estate planning is full of nuances and there are an abundance of opportunities that could make a huge impact on your family.


Disclaimer:  This article is intended to give general information about the subject matter addressed.  Your situation may be different. No attorney client relationship is created. Consult with your qualified legal and tax professionals regarding your specific situation.