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Managing Tax Basis in Estate Planning

January 29, 2018

Jordan Smith



This article by Jordan Smith, JD, LLM was originally published on

In what will likely prove to be one of the more memorable presentations at the 2018 Heckerling conference, Paul S. Lee, of The Northern Trust Company, emphasized the importance of managing tax basis as part of the estate planning process.

Maneuvering the Applicable Exclusion in Life and Death

Lee positioned the use of the applicable exclusion amount at death as providing “free basis,” because any assets covered by the exclusion will receive a basis step-up without being subject to federal estate tax. For that reason, he recommends only using the applicable exclusion during life in cases where lifetime gifts are necessary to prevent the exclusion from being lost (i.e., immediately before the recent doubling of the exclusion is scheduled to sunset).

Even then, Lee reminded attendees that it’s still uncertain whether any excess gifts made during lifetime will be clawed back and subjected to estate tax at death, and so he suggested that people should tread cautiously until Treasury Regulations are issued to clarify how those gifts will be treated.

Maximizing Your Basis Step-Up

Over the course of Lee’s presentation, he offered a number of intriguing strategies for maximizing the amount of basis step-up that can be realized upon death. The first priority, he explained, is ensuring that one’s taxable estate consists of the assets that would benefit most from a step-up in basis. Referencing a useful chart in which Lee ranked asset classes in accordance with the amount of income tax benefit that would be realized from a basis step-up, Lee described how Intentionally Defective Grantor Trusts can be used to pick and choose the most favorable assets for estate inclusion.

While many clients (and estate planners) might stop there—settling for a maximum realization of $11 million of “free basis” (per person, at today’s exclusion level)—Lee went on to propose ways in which one might “super charge” the amount of a free basis step-up, by borrowing against the value of low basis assets and then transferring the borrowed funds to younger generation members in ways that don’t require the use of exclusion. With a broad range of ideas that ran the gamut from traditional (GRATs) to controversial (Multi-Generation Split Dollar) to cutting edge (self-created contract derivatives), Lee showed off the creative side of tax planning while exhibiting a tremendous enthusiasm for his craft.

Leveraging the Benefits of Family Partnerships and LLCs

In the final segment of the presentation, Lee dove into the complex world of Partnership Tax, and explained how partnerships and LLCs could be used to engineer estate inclusion for the assets that would benefit most from a basis step-up, as well as ways in which one might strip basis from one asset and apply it to another. For attendees well-versed in the area of partnership tax accounting, this was probably the most interesting part of what was already a compelling session. For the uninitiated, it should probably have come with the disclaimer that complicated partnership tax planning is a bit like pyrotechnics in that one shouldn’t try this at home without the guidance of an expert. When done properly and everything works, the results can be awfully impressive, but even small errors could cause the whole thing to blow up in one’s face.

Overall, Lee’s presentation was simultaneously informative and entertaining. He attacked a technical subject matter and broke it down in a way that made it accessible and interesting for all.