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Up-streaming Trust Assets to Get a Basis Step-Up

Up-streaming Trust Assets to Get a Basis Step-Up

By Warwick Carter
Published on LinkedIn, March 24, 2018

One way to save tax dollars entails carefully reviewing trust documents to determine if they contain a little-known and often unused power whereby the trustee has the ability to confer a testamentary general power of appointment on a beneficiary.  This might exist in the case of GST taxable trusts where the drafting attorney wanted to create flexibility down the road to choose the estate tax regime instead of the less malleable GST tax regime.  Conferring a general power makes the trust fully (or partially) includable in the estate of the beneficiary upon his or her death and essentially “up-streams” the trust assets causing a basis step-up. Now, with the federal lifetime estate tax exemption exceeding $10 million per person, causing estate tax inclusion might be a good idea. 

Trustees should review trust instruments and carefully evaluate whether such a power exists and whether it makes sense to activate it.  But watch out for state estate taxes in states like New York and Connecticut. 

Warwick Carter