Probate & Trust Law Section Conference Manual ... - Minnesota CLE

Transfer tax issues are generally irrelevant. 9 This playbook assumes planners are familiar
enough with the first two prongs and thus focuses instead on income tax planning and assetpreservation
planning.
Planning at this level is not considered with wealth transfers; it’s usually more about
wealth preservation. The principal concern is making sure the surviving spouse will have
sufficient assets to maintain his or her accustomed standard of living.
Income Tax Planning. Here the focus is on preserving the step‐up in basis upon the
death of the surviving spouse. This can be lost where the first spouse’s will, for instance, leaves
everything to the surviving spouse through a trust that does not qualify for the marital
deduction. Though the assets inside that trust will not subject to the estate tax upon the death
of the surviving spouse, the whole premise here is that the total estate will likely not exceed the
applicable exclusion amount anyway, whatever that inflation‐adjusted number may be upon
the death of the surviving spouse. Yet the assets in trust will not qualify for a step‐up in basis
upon the death of the surviving spouse. Accordingly, most plans will want to provide for the
surviving spouse through either of two mechanisms: (1) an “I love you” will that leaves
everything outright to the surviving spouse; or (2) a trust over which the surviving spouse has a
testamentary general power of appointment. In either case, the assets remaining after the
surviving spouse’s death will still be eligible for the step‐up in basis, as they would be included
in the surviving spouse’s gross estate.
Couples with a combined estate of $2 million to $4 million or more may have engaged in
some tax‐driven estate planning within the past few years that might now come back to bite
them. They may have employed techniques using valuation discounts originally designed to
minimize estate tax exposure. If that exposure is now virtually eliminated thanks to the
increased exclusion amount, the previously employed techniques now serve to limit the stepup
in basis. Where possible, clients may consider unwinding those transactions in order to
maximize the value of the assets.
Asset‐Preservation Planning.Here the question is whether to leave assets to the
surviving spouse outright or through a trust. As always, the decision between an outright
bequest and a transfer in trust depends on many factors including the financial sophistication
and consumption habits of the surviving spouse, the surviving spouse’s vulnerability to undue
influence (whether from existing family members or those the surviving spouse might meet
9 If the client is married, the plan should contemplate whether a portability election will be made upon the death
of the first spouse. Though in most cases the DSUE amount will be unnecessary to protect the estate of the
surviving spouse from federal estate or gift tax liability, it will be helpful where the surviving spouse comes into
new, unexpected wealth (unanticipated appreciation in assets, hitting the lottery, landing and surviving a rich
paramour without being seduced into another marriage, and the like). A portability election should not be unduly
burdensome on the estate of the first spouse to die or its executor. After all, the regulations allow for a relaxed
reporting procedure with respects to assets passing to the surviving spouse, and those assets passing to
beneficiaries other than the surviving spouse will have to be valued for income tax basis purposes already.
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