Wills and Trusts

Wyatt, Tarrant & Combs, LLP

TRANSFER TAX COST VS INCOME TAX SAVINGS FROM “STEP-UP” IN BASIS – Part III

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Community Property Considerations

Given the central role the “step-up” in basis has in estate planning now, community property states have a significant advantage over separate property states because both the decedent’s and the surviving spouse’s on1-half interest in community property will receive a basis adjustment to fair market value under § 1014(b)(6) of the Code.  Because the unlimited marital deduction under § 2056 of the Code essentially gives couples the ability to have no transfer taxes on the first spouse’s death, this “step-up” in basis provides an immediate income tax savings for the benefit of the surviving spouse (rather than the subsequent beneficiaries).

This theoretically provides a bifurcated approach to estate planning for spouses in community property:

  1. During the lifetimes of both spouses, limit inter-vivos transfers and maximize value of the assets in order to benefit the most from the basis adjustment under section 1014(b)(6) of the Code.
  2. During the lifetime of the surviving spouse, with assets in excess of the Available Exclusion Amount (taking into account any amounts that might have been “ported” to the surviving spouse) transfer as much wealth out of the estate through inter-vivos transfers and other estate planning techniques.  Further, through the use of family limited partnerships (“FLPs”) and other techniques, attempt to minimize the transfer tax value of the assets that would be includible in the estate of the surviving spouse.

Notably, with the U.S. Supreme Court’s declaration that § 3 of the Defense of Marriage Act[1] (“DOMA”) is unconstitutional, pursuant to its decision in U.S. v. Windsor,[2] the tax planning ramifications are far reaching for clients in states like California where community property and same-sex marriage laws exist.[3]

The basis adjustment at death for community property and other planning considerations, including the electing into community property status, are discussed in more detail later in this outline.

Turney P. Berry

Louisville, Kentucky

[1] 1 U.S.C. § 7.  § 3 of DOMA defined marriage and spouse as excluding same-sex partners.

[2] 570 U.S. ____ (2013).

[3] Hollingsworth v. Perry, 790 F.Supp.2d 1149 (N.D. Cal. 2010), aff’d, 591 F.3d 114 (9th Cir. 2010 & 2012), aff’d, No. 12-144 (U.S. 6/26/13)

Leave a reply. Please note that although this blog may be helpful in informing clients and others who have an interest in information privacy and security, it is not intended to be legal advice. The information on this blog also should not be relied upon to form an attorney-client relationship.

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