Q: I have a client with a very low-income tax basis office building owned by an irrevocable trust set up by his father for my client’s benefit many years ago. The fair market value is about $2,000,000 greater than the income tax basis. There is no debt on the building. My client is almost 90 years old and has a net worth of roughly $1,000,000. Is there anything we can do to get a step-up in income tax basis on the office building?
A: Probably. The first step is to look at the trust agreement to see if there’s a trustee or trust protector who has the power to give your client a general power of appointment over the office building, exercisable at his death. A general power of appointment is the power to appoint it to yourself, your estate, your creditors or the creditors of your estate. Just having the power to do so causes estate inclusion and therefore a new income tax basis equal to fair market value as of the date of death.
If there isn’t such a power, then take a look at whether there is a decanting statute in the jurisdiction where the trust is sitused. You may be able to decant the trust into a new irrevocable trust that gives your client a power of appointment. Decanting means having the trustee distribute the trust property into a new irrevocable trust.
If there isn’t a decanting statute, or if that state’s decanting power doesn’t clearly allow the decanting to accomplish what you need done, then see if there’s a change of situs provision in the trust agreement. If so, then change the situs to Nevada by appointing Premier Trust as a co-trustee. Then decant the trust assets into a new irrevocable trust using Nevada’s enhanced decanting statute which very clearly allows what you need done here.
Bottom line is that you can often enhance a trust through decanting. But if you can’t do what you need done using the trust’s current situs’s rules, then always consider moving the trust situs to Nevada where you can often make changes that aren’t allowed in most other states.