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Estate and Tax Planning Techniques Available

Did you know there are estate and tax planning techniques available to clients that are the wealth creators in their families but whose parents or grandparents do not have significant wealth?

A planning technique, commonly known as “upstream power of appointment” or “senior power of appointment” (UPOA), provides for a general power of appointment (GPOA) to a senior generation over select assets held in a trust created by a wealth-creating client for the benefit of the client’s children.

The GPA causes inclusion of the trust assets in the senior generation’s estate. Accordingly, IRC § 1014 provides that such assets receive a step-up in basis. Additionally, the planning technique allows the senior generation to allocate their available GST tax exemption to the trust assets.

It is important that the senior generation awarded the GPOA does not incur an unintended federal estate tax or GST obligation. Planners should have a strong understanding of the gross estate and available exclusion(s) of the senior generation before implementing this strategy.

It is also crucial that the GPOA does not necessarily require the preparation and filing of a Federal Estate Tax Return (Form 706) for the senior generation. Accordingly, a formulaic approach to this tax planning technique might utilize a value of $100 (or some other similar dollar amount) less than the senior generation’s estate tax cap. One can also use the formulaic approach to prioritize assets that way you can focus the step-up in basis toward assets that benefit most along those lines. A step-up in basis is likely much more beneficial for a closely-held business interest than a checking account.

As with most complex planning techniques, it is important to work directly with the right estate and tax planning attorneys and advisors. This communication is designed to broadly inform readers of the general planning technique and possibilities for clients that create wealth without significant wealth present the “old fashioned way.”

For more detailed reading, see Handler, David A. and Christiana Lazo. “Senior Powers of Appointment.” Trusts & Estates, Sep. 2020, pp.14-21.

Give us a call if you have any questions.

Mike Green, Manager

Serving clients and working alongside like-minded team members excites Mike in his current role at Hancock Dana. Mike has extensive experience handling trust and estate entities, along with partnerships, “S” corporations, and individual returns. With more than 20 years of experience, Mike appreciates the work he does due to the level of attention to detail and necessary research to compose financial advice for our clients.