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Online Resources for Income Tax Planning as Part of Estate Planning

Online Resources for Income Tax Planning as Part of Estate Planning

Estate planning and administration income tax resources on the internet

The Internet provides a rich source of discussions and suggestions relative to the future of estate planning.  It particularly makes available a number of constructive analyses of the direction of estate-planning practices after the enactment of The American Taxpayer Relief Act of 2012 (ATRA), including the importance of focusing on related ordinary income and capital gains tax issues.

Income tax rates increased significantly after 2012, with the federal income tax brackets for 2013 topping at a marginal rate for incomes over $338,350 of 39.6 percent and a net capital gains rate of 20 percent. Thus, income tax planning for estates assumes even more significance.


Income tax planning as related to estate planning

As stated by Bob Keebler in the introduction to his Teleconference of April 24, 2013 (Ultimate Estate Planning):

Clients (and prospects) just aren't as motivated to do estate tax planning these days. But with income tax rates up, deductions being phased out and, on top of all this, now a 3.8 percent surtax, people are very motivated to reduce their income taxes!


The higher income tax rates set by ATRA create more income tax exposure for clients, estates, trusts and heirs and will need to be addressed by the planner.  For a discussion of the income tax effects of ATRA and income tax planning opportunities, see Keebler, Tax Planning for 2013 Under the New Laws (The Ultimate Estate Planner 2013). 

The context and issues of estate-planning-related income tax planning are discussed at length in:

Income Tax Planning Concepts in Estate Planning (Pierro Law Group), Annino, Planning at the intersection of estate and income taxes (CPA Insider) and Jacobs, Freebasing Your Estate (Forbes Feb. 12, 2014).

Estate Planning after ATRA: A Summary of the Heckerling Institute on Estate Planning (Hawthorn PNC, March 2013), includes discussions of income tax planning and business entity planning after ATRA.


The lingering effects of carryover basis

For a refresher on carryover basis, see Garber, 2010 Estate Tax Rules, Modified Carryover Basis vs. Estate Taxes ( Guide).  Elements of the carryover basis election affecting the heirs may also be found in the Instructions for the Form 8939

The IRS Form 8939 (also known as "Allocation of Increase in Basis for Property Acquired From a Decedent") was created in 2010 to deal with the optional carryover basis rules in effect for the 2010 tax year.  While the Form was due on or before Jan. 17, 2012, there are practitioners still dealing with key issues arising from it.  The Ultimate Estate Planner offers Vince Lackner, 33 Key Things to Know About Form 8939, which discussing lingering issues in dealing with allocation of basis for 2010 estates.

An heir who receives carryover basis property for which a valid carryover basis election has been made and the Form 8939 filed still has issues to address, including keeping informed as to any amended or restated Form 8939, the holding period of such property and understanding the tax character of inherited property (capital assets, trade or business property and depreciation recapture).  The carryover basis rules, the rules for filing of the Form 8939 and the issues that will need to be addressed by heirs are covered in detail in Perkins, The Preparation of Form 8939: Allocation of Basis for Property Acquired from a Decedent (YourOnLineProfessor.Net).  Perkins also discusses the circumstances under which the Form 8939 could be amended or supplemented of which the heir of carryover basis property must be alert.


Step-up in basis

Planning for achieving the maximum step-up in basis of family assets at death will become an increasing area of importance, given the number of estates that will have a step-up in basis of assets after death without any estate tax exposure.  The general handling of income tax in an estate and the effect of basis step-up at death is discussed in Income Tax Consequences at Death (Estate Planning Council of Seattle).  Income in respect of a decedent (IRS Publication 559) after ATRA still has no basis step-up

The basics of the partnership post-death basis election and how the step-up in basis of an inherited partnership interest is allocated are reviewed in Shubert, Partnerships and LLC’s: The Basics of Making a 754 Election (Marcum Accountants, August 2013). 

The New “OBIT” Trust (Ultimate Estate Planner–fee-based) discusses the problems of enabling basis step-up through conventional powers of appointment and QTIP trusts and the means of increasing basis through other trust arrangements.


Life insurance planning

Another planning change following ATRA will be that life insurance purchased with the purpose of funding estate tax may require reassessment from an income tax planning standpoint.  “Five Insurance Planning Insights from Heckerling,” AALU Washington Report, Bull. No. 13-06 (Feb. 6, 2013) discusses life insurance planning in the higher estate tax applicable exclusion environment after ATRA, the utility of life insurance in higher value estates and likely future federal tax legislation targeting life insurance planning techniques.  See Charles Ratner & Lawrence Brody’s “Life Insurance After ATRA,” in the April 2013 issue of Trusts & Estates, which addresses the opportunities and increased flexibility resulting from ATRA.  Also see Shenkman, Insurance as the Key Ingredient in the “New” Estate Planning (The Ultimate Estate Planner 2013) for a discussion of life insurance techniques as planning opportunities after ATRA.

The funds available to the trustee may be enhanced by planning the trust as a "defective trust" for income tax purposes. A trust should be considered defective under IRC Section 677(a)(3) to the extent that the income of trust assets is applied to the payment of insurance premiums. A Defective trust (IDIT/IDGT) may be useful in life insurance planning after ATRA 2012.  It may hold a variety of assets, serve for asset protection and include dynasty trust provisions.  See the discussion and suggestions in The Use of Intentionally Defective Grantor Trusts Post ATRA (AICPA 8/29/2013).  


Business Entities and the step-up in basis at death

Income tax reduction planning includes the effect of trusts, partnerships, LLCs and other entities, such as their function in shifting income to lower bracket family members.  See the discussion of FLPs and LLCs in Shenkman, Estate Planning after ATRA – The Taxpayer Relief Act of 2012 (

Business entities that were designed to result in value adjustments that mitigate the impact of the federal estate tax may no longer be necessary and, in some family circumstances, should be revised or eliminated.  Such entities reduce the efficiency of the step-up in basis at death because of discounted values of the decedent’s interests in them and provide only a step-up in the basis of the entity interests (except where IRC Section 754 applies), rather than individual assets.  In the case of depreciable property, such individual asset step-ups in basis result in immediate income tax benefits.  See, Neiffer, How Step-Up in Basis Works (Farm CPA, Feb. 26, 2013).

Fiore, A New Era in Estate and Succession Planning (NAEPC, December 2013) discusses business succession planning after ATRA and its importance in planning regardless of the federal estate tax involved.

Steve Akers’ “Musings on Heckerling 2013,” from ACTEC, include “The Estate Planner’s ‘Playbook’ for 2013 and Going Forward Under the Post-ATRA ‘New Normal’ of Permanent Large Exemptions and Portability.”  Akers touches upon basis adjustment strategies, gift planning issues and strategies, GRAT strategies, installment sales to trusts, partnerships and LLCs, high-net-worth estates and many other topics for the planner in the post-ATRA world.


The 3.8 Percent Medicare tax

The Patient Protection and Affordable Care Act (as amended by the Health Care and Education Reconciliation Act of 2010) imposes a 3.8 percent net investment income tax (commonly referred to as the 3.8 percent Medicare Surtax), beginning in 2013.  

The AICPA website provides numerous resources on Estate and Trust Impact of 3.8 percent Net Investment Income Tax, including Bob Keebler’s two page summary on Understanding the Net Investment Income Tax.   An excellent chart giving you a bird’s eye view of the operation of the tax is Applying the 3.8 Net Investment Income Tax, by Keebler.

The Ultimate Estate Planner offers fee-based resources on planning for and reporting the Net Investment Income Tax, including Robert Keebler’s Complete Investment Income Tax (“NIT”) Calculator for filling out the draft versions of the Forms 8959 and 8960 (Excel format, delivered by download, priced at $99).


Bottom Line

The increase in income tax rates by ATRA, the universal impact of step-up in basis at death, the new 3.8 percent NIT tax and the shift in the focus of estate planners to other issues after the increase in the federal applicable exclusion give to a rise to a need for resources on income tax planning in the estate planning context.  The internet provides a number of helpful solutions.



Trusts & Estates magazine is pleased to present the monthly Technology Review by Donald H. Kelley—a respected connoisseur of the software and Internet resources wealth management advisors use to further their practices.

Kelley is a lawyer living in Highlands Ranch, Colo., and is of counsel to the law firm of Kelley, Scritsmier & Byrne, P.C. of North Platte, Neb. He is the co-author of the Intuitive Estate Planner Software, (Thomson – West 2004). He has served on the governing boards of the American Bar Association Real Property Probate and Trust Section and the American College of Tax Counsel. He is a past regent, and past chair of the Committee on Technology in the Practice, of the American College of Trust and Estate Counsel.

Trusts & Estates has asked Kelley to provide his unvarnished opinions on the tech resources available in the practice today. His columns are edited for readability only. Send feedback and suggestions for articles directly to him at [email protected].

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