The document provides a summary of 10 important income tax considerations for estate planners. Some of the key points include: (1) Avoid gifts of highly appreciated property that would otherwise get a step-up in basis at death; (2) Generally better to donate appreciated property to charity rather than selling and donating the proceeds; (3) Consider transferring appreciated assets to the spouse most likely to pass away first to get a step-up in basis. Other points discuss the benefits of grantor trusts, the importance of domicile for state tax purposes, strategies for obtaining a step-up in basis in trust assets, and the tax advantages of life insurance and Roth IRAs.

1. Top 10 Income Tax Tenets
for Estate Planners
Estate Planning Committee of the D.C. Bar Taxation Section
May 3, 2016
Irene Estrada, J.D., CFP®
KPMG Washington National Tax
Washington, DC
Melinda Merk, J.D., L.L.M., CFP®
SunTrust Bank Private Wealth Management
Vienna, VA

2. Increased Importance of Income Tax
Considerations in Estate Planning
• With the increased Federal estate/gift/GST exemption ($5.45MM for 2016) –
and estate and gift taxes eliminated or recoupled with the Federal system in
most states – transfer taxes are no longer a concern for some clients
• Gap between estate and income tax rates has narrowed
‒ Highest marginal Federal estate/gift/GST tax rate is 40%
‒ Highest marginal Federal income tax rate on ordinary income/STCG is 39.6%
‒ 15% rate for LTCG and qualified dividends – 20% rate for higher income
taxpayers (28% for gold, art and other collectibles)
‒ Plus 3.8% Medicare surtax on Net Investment Income (NIIT) for higher
income taxpayers
‒ Plus applicable state and local income taxes
• Portability election may avoid the necessity of funding a bypass trust at the
first spouse’s death and allow for 100% stepped‐up basis in the couple’s
assets at the death of the surviving spouse, but….
‒ No portability of GST or state estate tax exemption
‒ Form 706 must be filed to make the election, even gross estate does not
exceed the exemption amount and would not otherwise be required
‒ Deceased spousal unused exclusion amount” (DSUEA) transferred to surviving
spouse remains frozen and is not indexed for inflation
‒ Substantial other tax and non‐tax benefits of funding bypass trust
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3. #1 – General Rules of Thumb
• Avoid gifts of highly‐appreciated property that would otherwise qualify for stepped‐up basis
at donor’s death
‒ Possible to avoid any adverse result with substitution power for gift made to “intentionally
defective” grantor trust (IDGT) ‐ see next slide
• Generally, better to donate appreciated property to charity vs. selling the property and
donating cash
• Sell or gift loss property prior to decedent’s death to realize/recognize losses that will
otherwise be eliminated upon death with a “step‐down” in basis
• Consider transferring highly‐appreciated assets to spouse who is likely to die first to obtain
stepped‐up basis at first spouse’s death (so long as deceased spouse survives more than 1
year from date of transfer)
‒ N/A for community property because 100% step‐up is generally available at the first spouse’s
death (so long as community property status is maintained)
‒ Consider transferring instead to lifetime QTIP for such spouse , which would continue as
grantor/ bypass trust for surviving spouse = “Supercharged Credit Shelter Trust”
• Generally best to avoid using principal residence to fund bypass trust due to loss of Section
121 exclusion and mortgage interest deduction for portion of property owned by the trust
‒ Consider granting a 678(a) “Mallinckrodt” power to the surviving spouse to withdraw taxable
income of the bypass trust (or capital gains generated from the sale of any residence owned by
the bypass trust) for a limited time window (i.e., during the month of December), which would
treat this portion of the bypass trust as a grantor trust as to the surviving spouse
• Don’t let the tax tail wag the dog – valid non‐tax reasons for gift and trust planning may
outweigh income and/or transfer tax considerations
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4. #2 – Benefits of Grantor Trusts
• Rev. Rul 85‐13 – treats the grantor trust as the grantor for income
tax purposes
• This allows for a number of beneficial tax results such as:
‒ Swapping low‐basis assets in a trust (particularly with GRATs) prior to
the grantor’s death
‒ Allows grantor to pay income tax on the trust’s assets without incurring
gift tax, effectively allowing the trust to grow tax‐free
‒ Any sale or other transaction between the grantor and the grantor trust
(or grantor trusts created by the same grantor) is generally unrecognized
for income tax purposes during the life of the grantor
• Allows grantor to defer or even avoid the capital gains tax on selling
appreciated assets to a grantor trust, and to avoid recognizing any income on
interest payments on installment note payable by the trust
• Ability to transfer life insurance policy from old ILIT to new ILIT without
triggering the transfer for value rule
• LLC formed by grantor and grantor trust (or grantor trusts created by grantor)
can be treated as single member LLC and disregarded for income tax purposes
‒ Avoid NIIT issues with compressed trust tax brackets
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5. #3 – Importance of Domicile for State
Income/Transfer Tax Purposes
• Some states (i.e., FL) are more desirable for state income and
transfer tax purposes
• Asset Protection Trusts (APTs)
‒ Allows grantor to be a discretionary beneficiary without having
estate inclusion
‒ However, some of these have recently been attacked on bad facts
• Incomplete Grantor Trusts (INGs or DINGs)
‒ Several PLRs including a recent 2016 one providing a blueprint
for how to structure these
‒ Some states may attack (see New York’s recent statute and the
long reach of other states such as Virginia)
• States base income tax on trusts on various factors (trustee’s
residence, beneficiaries’ residence)
‒ Some have been challenged on constitutional grounds
(Pennsylvania, North Carolina)
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6. #4 –Portability
• The 2010 Tax Act first permitted ‐ and the 2012 Tax Act
made permanent ‐ portability of any unused lifetime
exemption amount for a surviving spouse of a decedent
who died after 2010
• Decedent’s executor must make portability election on a
timely filed estate tax return
• Surviving spouse can use the decedent’s unused exemption
for gifts during life or bequests at death
• Best to provide express guidance or direction in will
and/or revocable trust as to whether portability should be
elected, especially in cases where no estate tax return
would otherwise be required 6

7. #4 (cont’d) –
Portability vs. By‐Pass Trust
• Advantages of Portability
‒ Simplicity ‐ trust structure is not required
‒ How assets are titled is of no importance
‒ Can avoid using ill‐suited assets to fund a trust (e.g., residence,
retirement/IRA benefits)
‒ Assets get step‐up in basis at second death
• Advantages of By‐Pass Trust
‒ Asset growth excluded from surviving spouse’s estate
‒ No risk of forfeiture of benefit due to remarriage
‒ Can achieve benefits of using a trust structure ‐ asset protection, asset
management, and ability to control ultimate disposition
‒ GST exemption of first spouse to die can also be utilized
• Best of both worlds?
‒ Using portability and having spouse create a defective grantor trust
‒ Allows for even more growth (spouse pays income tax on trust’s
income) but spouse cannot be a beneficiary
‒ Also cannot allocate GST exemption 7

8. #5 – Strategies to Obtain Stepped‐up Basis in
(Non‐Marital) Trust Assets at Beneficiary’s
Death
• Granting formula testamentary “limited” GPOA to beneficiary (e.g.,
surviving spouse with regard to bypass trust) to the extent of
beneficiary’s remaining estate tax exemption
‒ GPOA can be limited to the creditors of the beneficiary’s estate, or subject
to the consent of a non‐adverse party
‒ Power could apply to the most highly‐appreciated assets first
• Giving independent trustee the power to grant a testamentary
“limited” GPOA to beneficiary over all or a portion of the trust assets
• Giving independent trustee the power to distribute all remaining
trust assets outright to the beneficiary
• Joint Exempt Step‐Up Trust (“JEST”), or elective community property
trust, to obtain 100% step‐up at first spouse’s death
• “Upstream GRAT” to obtain stepped‐up basis for low basis asset
owned by child with parent that has excess estate/GST exemption
‒ Remainder interest could remain in an ongoing grantor trust over which
parent has a testamentary limited GPOA and child/grantor is a
discretionary beneficiary
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9. #6 – Roth IRAs and Stretch‐Out
Planning for Traditional IRAs
• Benefits of Roth IRA/Roth IRA conversion
‒ Funded with post‐tax $$, so distributions are generally income tax‐free
‒ No RMDs required during the owner’s lifetime
‒ $100,000 AGI ceiling for conversion eliminated for 2010‐later
‒ Conversion can be recharacterized/undone up to extended due date for taxpayer’s income tax
return for year of conversion (e.g., if value of assets converted goes down)
‒ Conversions are most advantageous for clients who have taxable estates, can pay income tax on
conversion with funds outside of IRA, and do not need RMDs for retirement
• Stretch‐out planning for Traditional IRAs
‒ Inherited IRA is generally not protected from creditors in bankruptcy [Clark, et ux v. Rameker,
573 U.S. (2014)]
‒ Owner’s revocable trust is often named as contingent beneficiary of his or her Traditional IRA,
particularly if there are minor children
‒ “Stretch‐out” benefits can be lost if trust is not designed as a conduit trust, or otherwise does not
qualify as a “designated beneficiary” (e.g., accumulation trust that names a charity or other non‐
individual as taker‐in‐default and/or gives a beneficiary a general power of appointment)
• Consider limiting takers in default and beneficiary’s power of appointment to individuals who are younger
the beneficiary
‒ Even if the trust qualifies as a designated beneficiary, RMDs will generally be required to be
made over the oldest beneficiary’s life expectancy
‒ Consider use of stand‐alone retirement trust for non‐spouse beneficiary to maximize stretch‐out
and creditor protection 9

10. #7 – Income Tax Advantages of Life
Insurance
• Cash build‐up and proceeds of life insurance are generally
income‐tax free and not subject to NIIT
• Some clients may no longer have a need for life insurance
for estate tax purposes, but still advantageous for:
‒ Income/wealth replacement
‒ Retirement planning
‒ Asset diversification
‒ Estate Equalization
‒ Legacy planning
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11. #8 – Fiduciary Income Tax Planning
for Estates and Trusts
• Making distributions to beneficiaries in lower marginal
income tax brackets
‒ 65‐day election
• Minimization of NIIT for trusts
‒ Distributions to beneficiaries not subject to NIIT
‒ Allocation of capital gains to trust income and distributing to
beneficiaries who are not subject to NIIT
‒ Trustee who materially participates
• Giving surviving spouse spray power over bypass trust to
distribute trust income to children in lower marginal
income tax brackets or to charity
• Advantages of Section 645 election
‒ Longer holding period for S corp
‒ Ability to use section 642(c)(2) deduction
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12. 12
#9 – Charitable Planning
• For taxpayers who are charitably inclined, there are a
number of options:
‒ Charitable Remainder Trusts (CRTs)
‒ Charitable Lead Trusts (CLTs)
‒ Private Foundations (PFs)
‒ Donor Advised Funds (DFs)

13. 13
#9 (cont’d) –
Other Charitable Planning Notes
• Unrelated business income tax may apply to charitable recipient
‒ CRUTs – 100% excise tax
‒ PFs and DAFs – taxable at relevant entity rates
‒ CLATs – limits trust’s charitable deduction for payments
• Excise tax on excess business holdings may apply
‒ If owns 2% or less, okay
‒ If owns more than 2%, can own up to 20% taking into account amounts
owned by disqualified persons
‒ If owns more than 20%, subject to 10% excise tax
• CRUTs are not qualified S corp shareholders
• DAFs might prohibit contributions of business interests
• Deduction more limited for appreciated property
‒ 30% of AGI (public charities) and 20% (private foundations)
‒ Reduction for amounts other than long‐term capital gain
‒ Limited to basis for contributions to private foundations

14. #10 – Income Tax Planning for
Buy‐Sell Agreements and
FLPs/FLLCs• Benefit of cross‐purchase vs. redemption agreement to provide remaining
shareholder(s) with stepped‐up basis in shares acquired
‒ Consider owning life insurance used to fund the buy‐sell in a separate LLC owned by the
shareholders, particularly if there are more than two shareholders and/or if there is a
disproportionate age difference between the shareholders
• Requires only one policy (vs. numerous policies) per shareholder
• Retains income tax benefits of cross‐purchase arrangement
• Provides additional creditor protection for underlying policies
• Avoids transfer for value rule that can otherwise be triggered in a cross‐purchase
arrangement upon exit or death of a shareholder
• Avoids disproportionate premiums for older vs. younger shareholders
• Benefit of Section 754 election upon death of a partner/member
‒ Caution: Valuation discount on deceased partner’s interest for estate tax purposes sets
the value for purposes of the basis adjustment – could result in a step‐down in basis
• Bipartisan Budget Act of 2015 repealed TEFRA effective for partnership/LLC tax
returns that are filed after 12/31/17
‒ Revamps how the IRS audits partnerships and LLCs, and allows the IRS to assess and
collect taxes associated with audit adjustments at the partnership/LLC level
‒ Replaces the role of “Tax Matters Partner” with new role of “Partnership Representative”
‒ Annual opt‐out election may be available for smaller entities
‒ All partnership and LLC operating agreements should be reviewed in light of these
changes 14

15. Questions/References
1. Paul Lee, “Venn Diagrams: The Intersection of Estate and Income
Taxation,” Hawaii Tax Institute, November 4, 2014.
2. S. Stacy Eastland, “Putting it all Together – Some of the Best Planning
Strategies We See in the New Frontier that Reduce Both Income Taxes and
Estate Taxes” (various versions available on the web).
3. Edwin P. Morrow III, “The Optimal Basis Increase and Income Tax
Efficiency Trust,” Leimberg Information Services– LISI Estate Planning
Newsletter #2080 (March 20, 2013).
4. Theodore B. Atlass, “Practical Income Tax Issues Arising in Everyday
Estate Planning and Administration,” Colorado Bar Association Tax
Section Luncheon, February 12, 2014.
5. Jonathan G. Blattmachr, Mitchell M. Gans, and Diana S.C. Zeydel
“Supercharged Credit Shelter Trust versus Portability,” Probate &
Property Magazine: Volume 28 No. 02 (March/April 2014).
6. Alan S. Gassman, Christopher J. Denicolo and Kacie Hohnadell, “JEST Offers
Serious Estate Planning Plus for Spouses—Part 1,” EST. PLAN. Oct. 2013);
Alan S. Gassman, Christopher J. Denicolo and Kacie Hohnadell, “JEST Offers
Serious Estate Planning Plus for Spouses—Part 2,” EST. PLAN. (Nov.
2013).
7. Jonathan G. Blattmachr, Howard M. Zaritsky and Mark L. Ascher, “Tax
Planning with Consensual Community Property: Alaska’s New
Community Property Law” 33 REAL PROP. PROB. & TR. J. 615 (Winter
1999).
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