In 2014 and going forward, income tax planning in estate planning will be parallel in importance to estate tax planning. For estate planners, planning for the step-up in basis (until that too is repealed) is a critical step. And in the partnership context, that step becomes critical. Typically, discounts for estate tax purposes reduce the potential step-up in basis and are therefore costly from an income tax perspective. That increased income tax burden will become apparent when a partner exits from the partnership.
Percolating out there in estate planning since 1984 has been the concern about retitling assets to allow the funding of the credit shelter trust at the first spouse’s passing. With the estate tax exclusion reaching $600,000 in 1984, planning often required a retitling of assets from one spouse to another to ensure that when the first spouse passed away, there would be sufficient assets to fund that spouse’s credit shelter trust.