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Estate Planning Strategies At A Difficult Time

December 02, 2008

Facing the reality that a loved one is dying is difficult for all concerned. But when the loved one’s legal and financial matters haven’t been addressed, family members also face the challenge of quickly making critical financial decisions. The good news is that there are estate planning strategies you can implement now.

Administrative tasks

To get started, determine whether your loved one has executed a will and durable power of attorney for property. The power of attorney gives you or another agent authority to handle a broad range of financial transactions.

If any of these documents exist, have the individual review them to see whether changes should be made and, if changes are needed, have his or her (or your) attorney make revisions.

If a will doesn’t exist, now is the time to draft one. Keep in mind that executing one at this point — regardless of an individual’s competency — may be problematic because deathbed wills are more likely to be successfully challenged. To offset potential challenges, have a doctor certify that your loved one is competent, if such is the case, and have the doctor witness the signing of the will. If there will be no surviving parent, be sure to appoint a guardian to any minor children your loved one has. If you don’t, the courts will appoint one.

Tax-saving strategies

Giving monetary gifts is an effective deathbed estate planning strategy. Certain exclusions from the gift tax allow an individual to make tax-free lifetime gifts without tapping his or her $1 million gift tax exemption. The funds are removed from your loved one’s estate (if given within three years of his or her death), which reduces the estate taxes. Here are several ways to give:

Cash and property. Using his or her annual exclusion, an individual can make an unlimited number of gifts of up to $12,000 per recipient in cash or property. Keep in mind that these gifts can be considered “incomplete” upon death. They aren’t considered gifts until the recipient has accepted the gift, ideally by cashing the check and causing the amount to be debited from the originating account.

In most states, the power to make such gifts to close relatives must be specifically given in the power of attorney — particularly if the donor is incompetent.

Tuition and medical expenses. Your loved one can gift an unlimited amount to pay someone’s medical or educational expenses, provided payments are made directly to the health care provider or educational institution. When gifting educational expenses, only tuition is included in the exemption. Also, medical expenses reimbursed by insurance aren’t covered.

Depreciated assets. Selling assets that have depreciated in value, such as securities or real estate, may allow the capital losses to be deducted on your loved one’s final income tax return, against capital gains and additionally up to $3,000. If a depreciated asset remains in the estate, the beneficiary must use the current market value as the basis, erasing the capital loss.

Irrevocable life insurance trust (ILIT). This trust offers tax benefits because it keeps the insured’s life insurance proceeds out of his or her taxable estate. And if structured properly, your loved one can use his or her annual exclusion gifts to fund it. Keep in mind that an existing insurance policy must have been transferred to the ILIT at least three years before the insured’s death. If the ILIT buys the policy for its current value, you can avoid the three-year rule.

Perilous pitfalls

Although many people include family limited partnerships (FLPs) as part of their estate plan, you should generally avoid establishing an FLP for someone who is dying. It’s likely to raise suspicions with the IRS that the partnership was established to avoid taxes and not for legitimate business purposes. Court cases have ruled in favor of the IRS in such situations.

Also avoid gifting your loved one’s appreciated assets. Instead, for tax purposes, leave real estate and securities as inheritances. The cost basis of inherited assets is the fair market value of the property on the date of the loved one’s death. The cost basis of gifted assets usually is the same cost basis that the giver had.

Strategies for security

Advance estate planning, when a person is of sound mind and in good health, is the best estate planning. But, as you can see, there are strategies you can implement at the last minute to enhance your family’s financial future.

Add protection

Is a “no-contest” clause included in your loved one’s will? If not, your family could be subjected to lengthy probate delays and costly litigation should a beneficiary challenge the will. A no-contest clause is a will provision that penalizes a beneficiary — possibly with the loss of part of his or her inheritance — who makes such a challenge.

It doesn’t guarantee that the will won’t be contested, but it might dissuade a beneficiary considering such litigation, particularly if he or she stands to lose something of value.

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