Greenspoon Marder International Wealth & Asset Planning Blog: The Voluntary Capital Gains Tax

Dec 31, 2019

With such huge exemptions from the federal gift and estate tax regime, people find more value in the newly designed trusts that allow for an early step-up in tax basis so that large inherent capital gains can we washed away without triggering any taxes. This can be accomplished by crafting a trust (or amending an existing trust) to allow a trustee or protector (upon a beneficiary’s request) to grant, if and when the time is right, what is known as a “general power of appointment” to one or more of the older beneficiaries of the trust. Such power results in the assets that are subject to the power to receive a step-up in tax basis upon the death of the older beneficiary. This power of course also allows such older persons to direct who gets trust assets during that person’s lifetime or at his or her death.

This may raise a concern that these older beneficiaries may use their general powers in a way that results in a loss of the affected trust assets to undesirable receivers. To better avoid: (i) the trust property becoming subject to the creditors of the older person; or an exercise of such power being made under the influence of others with nefarious motives; the power can be conditioned on the consent of a third party. The third party who must consent is typically an individual who the trustee or protector has previously selected to oversee that any such power is exercised, if at all, only in appropriate ways. The third party consenter must not be a beneficiary, but should be someone who will exercise his or own independent judgment when considering whether to provide consent.

Again, the trustee or protector would not grant the older person any general power of appointment until it would be wise to do so, and furthermore, the power of appointment may be granted only over certain assets (such as low tax basis assets that benefit the most from a step up in tax basis).

In granting any older person a general power of appointment, the trustee or protector should weigh the benefits such power provides against any downsides. The main benefit is allowing beneficiaries to avoid the negative impact on wealth by escaping unnecessary capital gains taxes. Care must be taken however to not over-grant the general power of appointment to such a degree that it could cause a generation-skipping transfer or estate tax in the older person’s estate.

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Greenspoon Marder International Wealth & Asset Planning Blog: The Voluntary Capital Gains Tax

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