Reprinted with permission of Estates and Trust
Plan for Incapacity
Many techniques we discuss require that the dying client him or herself, or someone authorized to act on their behalf, take actions. If not already completed, the client should execute a durable power of attorney (POA), which is effective on execution, authorizing an agent to make gifts and establish, amend or fund inter vivos trusts on behalf of the client during the client’s life.
A springing POA, which is effective only on incapacity, presents challenges. Locating one or more physicians who will attest to the client’s incapacity may be difficult and time-consuming. As a result, a springing POA creates a risk that a court may have to determine whether the client is incapacitated, which may cause significant delays that extinguish estate-planning opportunities. Moreover, even if the client’s physicians confirm the client’s incapacity, banks and other financial institutions may require additional proof or documentation.
If the client is already incapacitated and hasn’t executed a POA, you can petition a court of competent jurisdiction to appoint a guardian, conservator or committee, which is also time-consuming.
Fund the Revocable Trust
To facilitate estate and trust administration, the client may fund their revocable trust during their lifetime. Once the trust is funded, the trustee may begin managing the client’s assets before their death. Assigning the client’s property (for example, tangible personal property, bank and investment accounts, automobiles and real estate held solely in the client’s name) to the revocable trust will greatly simplify the management of the client’s assets by: (1) allowing the trustee to enlist the client’s help in identifying and marshaling the estate’s assets, and (2) avoiding a probate proceeding to transfer assets of the estate to the revocable trust or other beneficiaries. Also, if the client owns real estate or tangible personal property located outside of their home state, retitling such property in the name of the revocable trust may avoid ancillary probate proceedings in such other jurisdictions.
Make Tax-Free Gifts
The client should maximize the use of annual exclusion gifts and their ability to make tax-free gifts of education and medical payments. Hundreds of thousands of dollars may be quickly moved out of the client’s estate by: (1) making annual exclusion gifts outright or to a properly structured trust, (2) paying for any individual’s tuition at a qualified educational organization, which can usually be irrevocably prepaid to cover several years of expenses, or (3) paying for any individual’s medical care or medical insurance.
Cash is an ideal asset for eleventh-hour gifting because it has full basis and no built-in gains, and delivery is simple. A donee will receive the client’s carry-over basis of the gifted property instead of receiving a stepped-up basis on the client’s death. While lifetime gifting may serve to reduce federal and state estate tax, forfeiting a stepped-up basis may cost the beneficiary a capital gains tax if he or she sells the property in the future.
Make Charitable Gifts During Life
The client’s will or revocable trust may contain one or more sizable charitable bequests. Instead of waiting until death, the client may prefer to make lifetime charitable gifts and receive an income tax charitable deduction. The client may also enjoy the added benefits of seeing the fruits of their generosity and ensuring the gift is used for its intended purposes. An attorney should revise the client’s will or revocable trust to ensure that the charity doesn’t receive the gift twice.
Use Tax Exemptions
While a married client’s unused estate tax exemption is portable to their surviving spouse, the same can’t be said for the client’s unused generation-skipping transfer (GST) tax exemption. That is, the client either uses or loses their unused GST tax exemption at death (unless the client’s executor or trustee allocates the client’s GST tax exemption at their death). Optimally, if the client has available GST tax exemption, the client should use it during their lifetime to avoid wasting it. For example, the client may allocate GST tax exemption to existing non-GST tax-exempt trusts created during their lifetime.
Alternatively, if the client has a wealthier (and healthier) spouse, then the client’s spouse may transfer assets to the dying client to enable them to use the estate tax and GST tax exemptions. This may be preferable to relying on preserving the DSUE amount via portability, which may disappear if the surviving spouse remarries and outlives that spouse. A surviving spouse can’t accumulate DSUE amounts of several spouses who died and add the amounts together. Instead, a surviving spouse may only apply the DSUE amount from their last deceased spouse.
More Tips: See the entire article at 20 Tips for Planning at The Eleventh Hour.
Authored by David A. Handler and Kristen A. Curatolo. David A. Handler is a partner in the Trusts and Estates Practice Group of Kirkland & Ellis LLP. Kristen A. Curatolo is an associate in the New York City office of Kirkland & Ellis, LLP. Reprinted with permission of the publisher. Discounted subscriptions to their publications are available at Trusts and Estates.