The Cost of Lost Basis Step-Up

An agent was working with his married clients, Jim and Sue, on creating an estate plan, and reached out to John Hancock Advanced Markets for assistance. Jim and Sue were considering transferring ownership of a rental property to their defective irrevocable life insurance trust (ILIT) either by gift or loan (i.e., Sale of an Asset to a Grantor Trust or SAGT). They liked that the current rental property value, $5 million, would be frozen for estate tax calculation purposes and that all future rental property appreciation and income would flow into the ILIT, which would pass more to their heirs. Further, they liked that the trustee could use the rental property income to purchase life insurance to provide liquidity for the cost of estate taxes.