Sunday, August 3, 2014
One limitation of trusts is that trust property is ordinarily not eligible for a “step-up” in basis at a beneficiary’s death. However, property owned outright does get a “step-up” in basis at death, which eliminates capital gains tax on any gains to that point. This would seem to present an “either/or” choice where one could take advantage of the trust structure or give up the opportunity for capital gains tax relief afforded by the basis step-up rules.
Taking advantage of well-established tax principles eliminates the “either/or” choice. One solution is to create a provision in trust agreements called “the contingent general power of appointment (CGP).” This allows trust property to be included in a beneficiary’s taxable estate at death in order to qualify for a step-up in basis, as long as that will not cause any increase in estate tax. Consequently, trust property with previously unrealized capital gains can be sold with no capital gains tax liability.
See Day Pitney, LLP,Planning For Income Tax Basis “Step-Up”, Estate Planning Update, July 2014.