Estate, Gift & Trust Conference-Denicolo and Exline - Community Property Trusts Pt 1 and 2

Denicolo and Exline - Community Property Trusts Pt 1 and 2

Pdf Summary

The document explains how modern estate planning increasingly focuses on <strong>income tax basis step-up</strong> rather than estate tax avoidance, especially given the large 2026 federal estate tax exclusion of $15 million per person. Under <strong>IRC Section 1014</strong>, inherited property generally receives a fair market value basis at death, which can eliminate built-in capital gains. The presentation explores several ways to intentionally cause estate inclusion to obtain that benefit.

A major theme is the use of <strong>community property</strong>. In community property states, both halves of community property can receive a full step-up at the first spouse’s death under <strong>Section 1014(b)(6)</strong>. The slides explain traditional community property states, migration issues, quasi-community property rules, and the growing popularity of <strong>elective community property trust regimes</strong> in Alaska, Tennessee, South Dakota, Kentucky, and Florida. These “opt-in” trusts are designed to mimic community property and may deliver a full step-up, though the IRS has not definitively confirmed treatment for all of them.

The document also reviews other basis-step-up tools, especially <strong>general powers of appointment (GPOAs)</strong>. Under <strong>Section 1014(b)(9)</strong>, property included in a decedent’s gross estate through a GPOA gets a basis step-up. This allows planners to use elderly family members or trust structures to intentionally include assets in an estate, while balancing creditor exposure and estate tax risk.

A large portion discusses the <strong>Joint Estate Step-Up Trust (JEST)</strong>, which combines revocable trust planning, testamentary powers of appointment, and credit shelter/QTIP funding to achieve a full basis step-up on first death while preserving some asset protection. The presentation also covers concerns under <strong>Section 1014(e)</strong>, the one-year rule, depreciation adjustments, debt treatment, creditor issues, and IRS uncertainty.

Finally, it notes a separate strategy using <strong>partnership-taxed entities</strong> to shift basis among assets, often by distributing high-basis property to partners before appreciated assets are sold, with special care around partnership rules for marketable securities.

Keywords

income tax basis step-up

estate planning

IRC Section 1014

community property

general powers of appointment

elective community property trust

Joint Estate Step-Up Trust

Section 1014(b)(6)

Section 1014(b)(9)

partnership-taxed entities