Stepped-Up Basis to be Replaced by Carry-Over Basis

When you purchase an asset, the purchase price becomes your tax basis for that property. If you later sell that asset, your tax basis is used to determine your capital gain or loss for tax purposes.

If you receive property by gift, you take the donor’s basis. For example, Mr. Smith purchases ABC stock for $10 a share. Mr. Smith’s basis is $10 a share and if he sells the stock, his gain or loss would be based upon his $10 tax basis. Mr. Smith, instead of selling his ABC stock, gives his son the stock. His son’s basis is also $10 per share. This is sometimes called a “carry-over” basis, because Mr. Smith’s tax basis carries over to his son.

One benefit of inheriting property from a decedent is receiving a “stepped-up” basis. Pursuant to Internal Revenue Code (IRC) §1014, the basis of property inherited from a decedent is generally the fair market value of the property at the decedent's death, as opposed to the decedent’s cost to acquire the property. For example, Mr. Smith leaves his ABC stock to his son in his will. At the time Mr. Smith passes away, the value of the stock is $25 per share. Although Mr. Smith’s basis was $10, his son’s basis is stepped up to $25.

The benefit of the “stepped-up” basis will not be with us much longer, barring a legislative change. This is because the “stepped-up” basis under IRC §1022 will not apply to decedents’ estates with a date of death after December 31, 2009. Instead, IRC §1022 provides that the property acquired from a decedent shall be treated as transferred by gift. Therefore, when an heir sells the asset, he will be responsible for paying capital gains tax on all the gains that had accrued since the decedent originally acquired the asset.

Recommended Website: Password Safe

We regularly come across websites or web-based products that we find highly useful. One particular web-based product that we have used for years is Password Safe. This downloadable program keeps all of your usernames and passwords organized securely on your computer. Think of all of the usernames and passwords that you maintain for your email accounts, websites and security systems, We came across this website at a technology conference, and since then have all of our office and personal passwords saved in a password-protected safe on our computers. Another thing that is nice about Password Safe is that it is free.

Recommended Reading: Buy-Sell Agreements by Z. Christopher Mercer

After a recent post on Buy-Sell Agreements, I was fortunate to come across a very good read, Buy-Sell Agreements, Ticking Time Bombs or Reasonable Resolutions? by Z. Christopher Mercer. Mr. Mercer is a businessman and an experienced appraiser of business interests. His book does an excellent job of covering the topic of buy-sell agreements thoroughly. I recommend this book for reading by business owners, attorneys and anyone interested in the subject. The book is organized into short, easy to read chapters. It covers the topic from A to Z. I highly recommend the book. For additional information, visit Mr. Mercer's business website at www.mercercapital.com.

[Added Monday, July 27, 2009 - If you are interested in this book, see Mr. Mercer's comment below]

Setting Up Your Charitable Foundation

A private family foundation is a wonderful way to teach and expose your family to charitable giving. At an early age, members of your family can participate in the operations of the foundation and suggest worthy charities or charitable causes. The foundation can carry out the family legacy throughout the generations.

Once you decide that you want to establish a family foundation, you will need to decide how to structure it. A foundation can be set up as a trust or a non-profit corporation. Although there are fundamental differences between a trust and a corporation, both structures can be set up quickly and for similar costs. The corporate structure will involve some filing fees with the Secretary of State, but nothing extraordinary.

The governance of the private family foundation differs depending on whether it is a corporation or a trust. Under the trust approach, the trustee or trustees will make decisions subject to instructions in the trust agreement. The corporation will be run by its officers and a board of directors. The corporate structure may provide more flexibility in future changes to the charitable goals of the family foundation. If the foundation is being established by one person who wants to maintain a set charitable mission even after he/she is gone, the trust may be a better approach.

Regardless of how the family foundation is structured, it is an excellent opportunity to pass along the family legacy.

Term Life Insurance with a Savings Feature

In a recent post on term life insurance, we noted the advantages of this type of policy. It is a less expensive form of life insurance that permits a young couple to protect against the untimely death of the wage-earner. The negative aspect of term insurance is that it, in most instances, lacks a savings feature. When the term expires, the policy has no value.

There is a way to perhaps have your cake and eat it too. The product is a term life insurance policy with a rider that provides for a return of your premium payments at the end of the term. The insured has both the protection of the policy during the term and at the end of the term the savings in the form of the returned premiums.

Out of curiosity, we confirmed with an insurance agency that such a product does still exist.

Some Life Events Should Prompt a Visit to Your Estate Planning Attorney

The following is a list of events that warrant setting up an appointment with your estate planning attorney:

1. First Marriage – In most instances when a couple marries, they will want reciprocal wills that leave their estates to each other and nominate each to serve as executor of the other’s estate. If one spouse is wealthy, he/she may want to consult with their attorney regarding a prenuptial agreement (sometimes referred to as an antenuptial agreement).
2. Children – When children come into the picture, you will want to make sure your will addresses who should be guardian for your minor children if your spouse is unavailable. Also, if you have accumulated some assets and/or you own life insurance, you may want a contingent trust for the benefit of your children if your spouse fails to survive you.
3. Divorce – In the event that you divorce, you will want to change your estate planning documents, and make sure that you update all beneficiary designations. For an example of why you want to update your beneficiary designations, see our earlier post, discussing Kennedy v. Plan Administrator For DuPont Savings Plan.
4. Plans to Remarry – If you have been married before and plan to remarry, you may want to discuss the various issues raised by a blended family. A blended family makes estate planning more complicated and communication with your family may be very important. It may be advisable to create a prenuptial agreement.
5. Significant Changes in Your Assets – A change in the value of your assets, the type of assets, or titling of assets may lead to a change in your tax planning strategy and/or the disposition of assets.
6. Significant Changes in the Law – Over time, the laws affecting probate, estate planning and tax planning change. It is a good idea to periodically review your estate plan and personal information with your attorney in the event of such changes.

U.S. Supreme Court Decision Emphasizes the Importance of Updating Your Beneficiary Designations After Divorce

The decision of the United States Supreme Court in Kennedy v. Plan Administrator For DuPont Savings Plan stresses the importance of updating your beneficiary designations after a divorce. The Kennedy case is a classic example of the black letter law requiring an inequitable result.

William Kennedy worked for the DuPont Company and participated in its savings and investment plan (SIP). In the 1970’s, he married Liv Kennedy and a few years later he designated her as a beneficiary on his SIP account. Mr. and Mrs. Kennedy divorced in 1994 and the divorce decree divested Liv of all interest in the SIP account. For whatever reason, Mr. Kennedy failed to sign a new beneficiary designation form, removing Liv and substituting his children. Mr. Kennedy died in 2001 and DuPont paid the SIP account, consisting of $400,000, to his ex-spouse.

The U.S. Supreme Court held that DuPont’s payment of the account to Liv was proper. The basis for the decision was that the Employee Retirement Income Security Act of 1974 (ERISA) requires plan administrators to follow the documents and instruments governing the SIP. Although the divorce decree divested Liv of her interest in the account, Mr. Kennedy was still required to update the beneficiary designation form.

The lesson is that we all need to maintain a file for our various assets, request a copy of our beneficiary designations, and periodically review these designations.

Fiduciary Duties – Claims of Creditors

Once the fiduciary of an estate files an inventory of probate assets and establishes an estate checking account, the valid debts of the decedent should be paid. This, of course, assumes that the estate is solvent. In the case of insolvency, the fiduciary needs to wait for the claim period to run to determine the extent of the insolvency and the priority of payments.

Creditors have six (6) months from the date of the decedent’s death to present a claim in writing to the fiduciary. If the claim is not timely presented, it is barred by statute.

Buy-Sell Agreements for Estate Planning Purposes

A buy-sell agreement can have an important purpose in an estate plan. It is an agreement used by business owners to sell the interest of a deceased owner to the remaining owners for a pre-determined price or by use of a pre-determined formula. The advantages are allowing the remaining owners to retain control of the business and assuring a definite price and buyer under mutually agreeable conditions.

What about the value of the business interest for estate tax purposes? Will the buy-sell price control for estate tax purposes? It will if the stated price in the buy-sell agreement was entered into for a bona fide business arrangement and was not a testamentary substitute intending to transfer the interest for less than fair and adequate consideration.