Cape Cod Lawyers Offering Guidance on Optimal Basis Increase Trust™ Provisions to Clients & Their Families

Following the new rules implemented by the Tax Act of 2010, the so-called permanent estate tax exemption has caused many people to shift their focus away from estate tax planning. Instead, individuals and families are turning their attention towards ways they can reduce potential taxes on their capital gains.

An Optimal Basis Increase Trust ™ , or OBIT in short, is a form of irrevocable trust set up by a decedent. The assets placed in this type of trust will receive a stepped-up basis upon the surviving spouse’s death, avoiding the trap of paying capital gains.

An OBIT combines the benefits of a typical A-B or Irrevocable trust with the ability to obtain a basis step-up for trust assets upon the trustmaker’s or beneficiary’s death, as well as avoiding possible “step-downs”, saving the family capital gains and income tax. The provisions in an OBIT allow your family to improve the income tax efficiency of a revocable trust after death or the tax efficiency of an existing irrevocable trust.

Who Should Consider Adding an OBIT Provision to their Trust?

Any trustmaker or beneficiary who is looking to adapt to the new changes or have had irrevocable trusts negatively impacted by these changes should consider speaking to an Estate Planning attorney about adding an OBIT provision to their trust. With many taxpayers no longer being impacted by federal estate taxes (which now only impacts estates valued at over $11.4 million dollars, or $22.8 million dollars for married couples), it is extremely important to update your trust to account for the fact that paying income tax is now a bigger concern than estate tax.

The income tax has now increased for trusts as well as for individuals making over $200,000.00 dollars (or $250,000.00 jointly). This means that top rates can be as high as 23.8% for long-term capital gains and qualified dividends, and 40.8% for other taxable investment income. In addition, state taxes are added on top of that.

When Should an OBIT Clause Not Be Included in a Trust?

This applies only in very specific cases, when a beneficiary cannot be trusted to properly exercise the power of appointment given to him or her. That means a beneficiary would have the authority to control the disposition of the assets in the trust. If the named beneficiary has questionable financial skills or presents irresponsible behavior that may jeopardize the assets in the trust for the next generations, trustmakers may choose to not include an OBIT clause in their trust.

The goal of this clause is to minimize ownership liability and tax exposure for the beneficiary and his or her next generation. But if an untrustworthy beneficiary chooses to appoint power to any person whom the trust creator may not have approved, he or she might even cause future generations of the trustor’s descendants from receiving any further benefit from the trust.

How Can I Update My Trust to Include an OBIT Provision?

As many trusts no longer need to focus on reducing high estate tax payments, clients are urged to review their current trust terms. Adding a properly drafted OBIT provision can help beneficiaries minimize income tax paid on appreciated assets placed in the trust.

Being a form of irrevocable trust, an OBIT also offers protection from creditors, lawsuits, overreaching spouses and in-laws, divorce, and other external threats that may compromise the assets and values placed in a trust. Additional benefits of having an OBIT in place include the ability to avoid having income trapped in trusts at higher tax brackets and even allowing the shifting of income to family members and even charities who may be in lower tax brackets.

While an OBIT is based on well-known laws, it also contains many complexities due to its innovative format and the substantial research behind it. Adding this provision to your trust should only be attempted by those with knowledge in this area of law.

At Boyd & Boyd, we are proud to be able to offer this option to our clients who currently have a trust that needs updated. We can help you. Call us at (508) 775-7800.