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________________________________________________ Estate Planning
Strategies Ben Franklin said only two things in life are certain: death and
taxes. When a family member is elderly or seriously ill, both death
and taxes are all too certain. Although you can't reduce the emotional
impact of a family member's death, you can reduce the tax impact
with proper planning. The term "deathbed planning" is often used to describe
implementing or fine tuning the estate plan of an elderly or seriously
ill person. Time is limited, yet a number of planning techniques
can reduce or minimize taxes and enhance the estate that is left
for the family. Of course, initial attention should be focused on the welfare and
comfort of the dying person, as well as providing for the orderly
transition of the estate. These concerns include healthcare powers
and living wills, durable powers of attorney, funded living trusts,
and listing advisors, inventory of assets and essential documents.
But there may be time to try to reduce the tax burden for heirs.
There are several places to look for possible tax savings and the
techniques that are available. Make
Lifetime Gifts Gift tax advantages. Taxable transfers made during life
(gifts) are less expensive than those made at death (bequests).
Why? For a gift, tax is paid on only the amount of the gift itself,
while for bequests, tax is paid on the amount of the bequest plus
the amount used to pay the tax on the bequest. In other words, gifts
are tax exclusive and bequests are tax inclusive. But, there is
often little advantage to making gifts shortly before death because
the tax paid on taxable gifts made within three years of death are
added back to the estate when making the federal estate tax computations.
Annual exclusion gifts. One exception is the annual exclusion
gift, which allows someone to give $10,000 per year ($20,000 if
the gifts are split with a spouse) to an unlimited number of recipients
tax free. Each annual exclusion gift will save $3,700 to $5,000
in estate taxes, depending on the person's estate tax bracket. Accordingly,
someone with three children, two daughters-in-law and five grandchildren
can make deathbed gifts of $200,000 ($20,000 x 10 recipients). The
assets will still be in the family, and the estate would save between
$74,000 and $110,000 in estate taxes. As a bonus, the gifts to grandchildren
are not subject to the 55% generation-skipping transfer (GST) tax
and do not use any of the $1 million GST tax exemption. Gifts of controlling interests. Some gifts can make taxable
value disappear. If a controlling interest, for example 52%, is
held in a family business or venture, a gift of a 3% interest to
family members can allow the remaining 49% to be valued for estate
tax purposes without a control premium, thus lowering estate taxes. Gifts between spouses. Gifts between spouses also can be
advantageous in equalizing estates to fully use the $625,000 unified
credit equivalent or in equalizing estate tax brackets. All gifts
between U.S. citizen spouses are gift and estate tax free. A lifetime
qualified terminable interest property (QTIP) trust might help as
the vehicle for the gift. Consider
Income Taxes Capital losses. Assets in the estate get a new basis for
income tax purposes. Generally, this is a step-up in basis. But,
there also can be a step-down in basis if stocks or other capital
assets have a current value less than what was paid for them. These
should be sold before death to recognize the losses. The losses
can still be used on the income tax return and any extra losses
may carry forward on a spouse's return. Otherwise, the losses are
gone and will not be available to the estate. Deductible contributions. If deductible contributions can
be made to an individual retirement account (IRA), profit sharing
or other relevant account, they should be made at this time. Deductible charitable bequests. Bequests to charity should
be advanced and paid now. The estate tax consequence remains the
same, but as an additional benefit, the individual will receive
a current income tax deduction. If the dying family member cannot
change his or her will, the charity should be willing to acknowledge
that the gift is an advancement. Also, consider whether a bequest
to charity can be satisfied through an IRA or qualified plan beneficiary
designation; either can result in significant income tax savings.
An alternative is to increase the bequest to a spouse and put language
in the estate plan expressing a strong desire that the spouse make
a lifetime charitable gift. The estate will still use deductions
(marital instead of charitable), and the spouse then can take advantage
of income tax benefits by making gifts to charity at suitable times. Deferred income. In some situations, deferred income can
be accelerated and recognized currently. The income tax paid should
be less than that paid (after credits) by the estate. Here it becomes
necessary to make projections and income forecasts. Examine
Business Structures Preservation of status. The estate or living trust can be
a shareholder of an S corporation for only two years. After that
time, the shares need to be redeemed or passed to a qualified shareholder,
otherwise the special S corporation status is lost. If the person
owns S corporation stock, his or her estate plan should direct proper
disposition of the S corporation shares. Special trusts eligible
to own S corporation stock, known as qualified subchapter S trusts
and electing small business trusts, can be created for minor children
or other beneficiaries. Pass-through taxation. The owners of certain types of business
entities are taxed directly on business net earnings, whether or
not they receive a distribution from the business. These entities
are S corporations, partnerships, limited liability partnerships
and limited liability companies. Is this an issue that needs to
be reviewed in light of the designated beneficiaries of the interests
under the estate plan? If there are capital losses in these entities,
can these losses be extended to be used by a spouse? Partnership
investments also create a special situation. When a partner dies
during the year, partnership books for the deceased partner are
deemed to close on the date of death. The income or loss is either
allocated pro rata or an exact allocation is made. Accordingly,
this can result in an overall tax mismatch of income and losses.
Consider transferring this partnership interest now into joint tenancy
or making provisions for a successor in interest under the partnership
agreement. Deferrals and redemptions. Special tax benefits are available
when a large part of the estate consists of interests in closely
held businesses. If the estate meets certain percentage qualifications
and other Internal Revenue Service (IRS) tests, it can pay part
of the estate taxes in installments over 15 years (with interest,
of course, and for a limited partner, the interest is at the bargain
rate of 2%). Also, the estate or beneficiary may be able to redeem
part of any corporate stock to pay taxes and administration costs
and receive favorable capital gain tax treatment. It is time to
analyze the estate to see if it meets these tests. Review
Life Insurance Policies At this point, any life insurance owned by the ill person probably
will be included in the estate even if it is transferred. Yet, there
may be some planning opportunities available and they need to be
discussed with the insurance agent. Repayment of loans. If any policy loans are outstanding,
investigate the advantages of paying off the loans, which may increase
policy dividends. If the dividends are being used to buy term or
paid-up additions, in effect, the ill person will be buying more
life insurance, even though he or she is not insurable. Also, some
state inheritance tax laws give special tax benefits to life insurance
proceeds compared with other types of assets. Further, if the estate
may have creditor problems, life insurance proceeds again may receive
favored treatment, so don't let policy death benefits be reduced
by an outstanding loan balance. Waiver of premium clause. A premium waiver provision that
would come into play during disability will keep the policy in force
until death and may also entitle the ill person to a refund of all
or part of a recent premium payment. Miscellaneous Change of domicile. Let's say you have a terminally ill
parent who has a substantial estate and is living in a state that
has a high inheritance or estate tax. Or, perhaps probate in your
parent's state is a particularly expensive procedure. Comfort, care,
treatment and all else being equal, a change of your parent's domicile
to a "friendlier" state that may have only an estate pick-up
tax may be possible and practicable. Domicile may be changed upon
meeting some simple criteria. The resulting savings can be significant. Transfer by spouse. Generally, if someone receives a gift
of appreciated property and dies within one year thereafter, that
property will not receive a step-up in basis in the estate if the
property passes back to the donor. The step-up in basis can be important
because it can eliminate the 20% capital gains tax on the amount
of appreciation. Therefore, gifts to an ill spouse should not be
overlooked. First, there is always the possibility that the spouse
will survive more than a year. Second, perhaps the transferred property
can be allocated to satisfy other bequests with the transferring
spouse being equalized through the marital formula. Raising
the Subject Perhaps the most difficult part of planning in anticipation of
death is raising the subject. It is impossible to be distant and
detached. Yet, the benefits and tax savings that are available require
a discussion to be started. Each person's estate situation is different,
and other planning opportunities may become evident only if the
subject is addressed. |
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Copyright 2001 Fahlman & Olson. All rights reserved.
LEGAL NOTICE
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