This blog has explored the issues revolving around an ABC trust in the past and how its previously primary reason for existence is now no longer a consideration for many people. The primary reason for their existence was to ultimately lowering the overall tax liability of the parties by sheltering one spouse’s assets and estate tax liability from the others. With the higher estate tax exemption and exemption portability allowed between spouses, its utility is diminished. For those in New York, however, there is some need to maintain it for New York estate tax purposes. There are other benefits to having such a trust. ABC trusts are known by many names, including a credit shelter trust or a joint spousal trust.

There is little if any difference between the names. Another benefit to such trusts is the step up basis that is accomplished upon the passing of the owner. Whenever title to that asset eventually does pass, the new owner will have a higher basis, so that when they in turn pass title, they will have a lower capital gains tax bill. Indeed under federal estate tax law, the stepped up basis will likely be not be an issue for estate tax liability, given the large federal estate tax exemption and availability of the portable exemption between spouses. New York’s estate tax, however, makes it more likely that a joint spousal trust should be employed, so that the deceased spouse’s original basis can be noted and the surviving spouse can account for any increase in basis for their estate when they pass away, since the surviving spouse gets full stepped up basis of the asset. This can help to possibly reduce the overall tax bill.

It is important to note that the IRS does not treat an interspousal transfer of an asset as a gain or loss for tax purposes. The law treats interspousal transfers as a nontaxable event but the spouses also maintain the same basis. Under 26 USC §1014 once one spouse passes that changes, however. However, there must be an accounting of the basis and the stepped up basis is generally split between the two. This matters when the surviving spouse has to account for their own basis in the event they decide to sell it and thus trigger capital gains tax liability. In addition, if the surviving spouse passes this asset in their own estate, their stepped up basis will be noted, which matters for their own estate tax liability. Finally, if the surviving spouse decides to gift the asset, there must be an accounting for their own gift tax liability purposes.

In the end, a thorough review and analysis of the couple’s assets and testamentary intentions needs to occur. The age of the couple, the value and nature of the assets all play into the final decision on estate planning. If the couple is younger and their estate is already close to the state estate tax exemptions or if they own assets that will likely increase in value quite rapidly, there may be a need to consider whether it more advantageous to pay the capital gains tax or the estate tax or some other strategy all together.  

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