The Optimal Basis Increase Trust: Exploiting Opportunities to Maximize Basis, Lessen Income Taxes and Improve Asset Protection for Married Couples after ATRA (Or: Why You'll Learn to Love the Delaware Tax Trap)

Abstract

In Part I, the author describes the main income tax problems with the current design of most AB trusts in light of portability and the new tax environment – and problems with more simplified estate plans. Part II describes potential solutions to the basis issue, including the use of various marital trusts (and the key differences between them), and why these may also be inadequate. Part III explores how general and limited powers of appointment and the Delaware Tax Trap can achieve better tax basis adjustments than either outright bequests or typical marital or bypass trust planning. The paper refers to any trust using these techniques as an Optimal Basis Increase Trust (OBIT). Part IV discusses how these techniques accommodate disclaimer based planning (or disclaimers from lack of planning). Part V discusses how married couples can achieve a double step up at first death without living in a community property state and how to benefit from upstream planning for basis increases.Part VI discusses new asset protection opportunities opened up by the increased gift tax exclusion. Part VII discusses the tremendous value of applying OBIT techniques to pre-existing irrevocable trusts. Lastly, Part VIII discusses various methods to ensure better ongoing income tax treatment of irrevocable trusts – not just neutralizing the negatives of trust income taxation, but exploiting loopholes and efficiencies unavailable to individuals, including how a taxpayer might get an above the line deduction for gifting to their children. These techniques include using trust provisions to make income taxable to a beneficiary, lifetime powers of appointment, regulations that permit capital gains to be taxed to a beneficiary and charitable deductions available to trusts.These techniques taken together are referred to as an Optimal Basis Increase and Income Tax Efficiency Trust.