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Wills, Trusts & Estates: Plain and Simple – Is it Time to Consider Distributing Assets Held in Existing Trusts?

March 16, 2021

It is not uncommon for a trust to have been created for a surviving spouse under a Will or revocable trust, in order to keep the assets in that trust out of the surviving spouse’s estate for estate tax purposes, when the survivor dies. This is sometimes called a “credit shelter trust” or an “exemption trust.” If such a trust was created upon the death of the first spouse at a time when the NYS estate tax exemption was well below the current estate tax exemption (currently, almost $6 million), you may wish to consider distributing some or all of the assets held in the credit shelter trust to the surviving spouse to save on potential income taxes resulting from capital gains.

A capital gain occurs if an asset is sold or exchanged at a price higher than its income tax basis. The income tax basis is the original purchase price of the asset plus the cost of improvements less depreciation. When someone dies, the assets that they own receive a “step-up” in income tax basis to the value at that person’s date of death. For example, if Mary purchased stock for $1,000 and the value of the stock increased to $10,000 as of her date of death, the recipient of that stock under Mary’s Will would take a “stepped-up” income tax basis in that stock of $10,000; if that recipient sold that stock for $10,000, he or she would recognize no capital gain.

Reprinted with permission from Lloyd Harbor Life, March 2021. 

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  • Related Practice Areas: Trusts & Estates
  • Publications: Lloyd Harbor Life