Do you remember when the federal estate tax was something to worry about and plan around? I do. I can remember when an estate was taxable if it was greater than $600,000. That tells you how “experienced in life” I am. Now, a husband and wife can have a joint estate of over $22 million and not be subject to the federal estate tax. Wow! What’s the point of having a federal estate tax now–I mean I don’t bump into too many people at the grocery checkout line with that kind of money, do you? So, it may be understandable if some folks get a bit cavalier about having an old will reviewed. I mean, I can almost hear you say, “Hey, I have no where near that amount of money in my estate, and my will has this old trust in it, but at the end of the day, my children get it all, so what’s the problem? Why worry? I’m not going to be on the hook for the federal estate tax anyway.” All true. All except the part about “what’s the problem” with that old trust. If you and your spouse have a joint estate of less than $22.4 million and at the time of the last of you to die your children get everything, then you’re right–the estate tax is not an issue. But, there is potentially a tax problem with that old trust arrangement in your old will that could cost your kids some tax money down the road. Here’s why. If you or your spouse die owning property, then that property gets a “stepped up” basis to the fair market value of the property as of the date of death. But, if you put appreciating property in a trust (say, some corporate stock or a piece of real estate) so that the property bypasses your spouse’s estate (remember that old trust device called a bypass trust?), then the property doesn’t get the second stepped-up basis at the time of the death of the second of you to die. Bypass trusts in old wills were designed to keep property out of the estate of the second to die of a married couple in order to save estate taxes. But now with estate tax savings being of limited importance (essentially of no importance except for the very rich), the focus now turns to income tax savings. If property doesn’t get that second stepped-up basis, then when your kids sell the property they inherit from the second of you to die, they will pay more in income taxes when they sell the property. In other word, they will have a higher income tax gain because the basis in the property will be lower. So, the moral of the story is this: if you have an will with a bypass trust, you should have it reviewed and probably revised to take advantage of the step-up in basis on the second to die of a married couple.
