In a parallel universe, there is a planet called Avalon, identical to our Earth in all but one respect: Its counterpart to the United States Internal Revenue Service actively assists taxpayers to pay the minimum possible tax they are legally obligated to pay. It's no surprise that the credit shelter trust, also known as a bypass or "B" trust or exemption equivalent trust, was an extremely popular device in the United States of Avalon.
This only became truer after a faceless bureaucrat happened upon the idea of what became known as Avalon Inter-Galactic Revenue Service Form 649. Form 649, a standard check-the-box election form consisted of simple instructions and two boxes, Box A and Box B. The form was sent to all trustees of bypass trusts that were funded (funding, of course, having occurred upon the death of the first spouse to die).
If the trustee of the credit shelter trust checked Box A, the form would have no result. But if he checked Box B, the assets in the bypass trust would automatically receive a second step-up in basis after the death of the surviving spouse.
Did any trustee ever check Box A instead of Box B? The only one on record was sued, driven from the profession, and died shortly thereafter in one of Avalon's many lunatic asylums. Few tears were shed for him, because the planning community clearly recognized that one would have to be incompetent, if not insane, not to check Box B.
Doubtless, our Earth could use many more lunatic asylums. But we don't need Form 649. We already have something as good. Here on Earth, significant tax advantages can be achieved by widows and widowers who are beneficiaries of bypass trusts (first funded upon the deaths of their respective spouses), through the purchase by the bypass trust of insurance on the life of the surviving spouse. The exclusion from tax on the life insurance provided by I.R.C. §101 means that at the death of the second spouse the life insurance is an appreciated asset with a basis equal to the appreciated value, not the value at purchase -- in effect, a second step-up of basis for bypass trust assets.
Since the subject involves a vast untapped market for life insurance, through which a family can effectively achieve a second step-up in basis of property passing at death, it warrants a careful analysis. Every advisor with suitable clients should consider this.
For additional information see: AUS Special Reports Section 50.5, Subdivision A-- Funded Credit Shelter (or Bypass) Trusts as Potential Purchasers of Life Insurance. Not a subscriber? Not a problem. You can link to www.onlineAUS.com
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Copyright 2009 by the National Underwriter Company from AUS.
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