What Can Taxpayers Do to Cause Assets in Trusts to Be Included Back in Their Gross Estates? Does that Make Sense?
The top income tax rate of 37% (or 40.8%, with the net investment income tax (NIIT) imposed under Section 1411) is about the same as the Federal estate tax rate of 40%. So, the question arises as to whether such lifetime gifts make sense from a tax perspective.
For several reasons they do. First, almost all inherited assets are treated as long term capital gain property where the top rate usually is only 20% (or 23.8% with the NIIT). See section 1223(9). But typically, that lower rate can be obtained during lifetime as well as death. Second, not only is the tax on the property given away postponed until after death but income and gain earned on the assets after being given away may not be subject to estate tax when the owner dies. But keeping assets out of an owner’s gross estate means, in general, there will be no “step up” in basis when someone dies. On account of the very large estate tax exemption ($15 million in 2026 and increased for inflation in later years), avoiding estate tax is not important for most people. In an “ideal” world, a taxpayer may wish to avoid estate tax even on amounts above the exemption amount and yet enjoy the stepped-up basis at death. What can be done to accomplish that?