Tax Planning for Nontaxable Estates

Owners of modest estates are always greatly relieved to learn of the liberal federal estate tax exemption of $60,000. Freed from the burden of federal estate tax planning they frequently turn their attention to methods of transferring property which will avoid the heavy cost and delay incident to probate administration. Joint ownership, gifts of remainder interests, donee-beneficiary contracts, revocable trusts are among the more common devices available. Use of any one of these plans may accomplish a shift in possession and enjoyment of property upon the death of the planner with no delay and minimum expense.

But the income tax consequences of adopting substitute testamentary methods are frequently overlooked. Some of the income tax rules are without any policy justification but until Congress can be persuaded to rewrite the cost basis provisions of Internal Revenue Code section 113(a)(5) to include all transfers which are taxed as testamentary, their arbitrary effect will continue to result in what, to the writer, seems grossly unfair tax treatment.