Estate Planning for the Very Elderly

Estate Planner May-Jun 1997
Even the estate plan of someone in his or her 90s can be tweaked to gain tax benefits. The following are just a few planning techniques based on the reality that someone has only a few years left and it is unlikely his or her assets will greatly appreciate in those years:

Avoid making gifts of highly appreciated property. Although a lifetime gift of highly appreciated assets can cost less in transfer taxes, it can cost more in capital gains taxes. For example, an elderly couple splits a gift worth $2 million. They use their combined $1.2 million unified credit and pay a current total gift tax of $306,000. If they live three years (gift tax paid on a gift made within three years of death is included in the transferor’s estate), they could save up to $168,300 in transfer taxes because it is more tax efficient to make a taxable gift than to leave a taxable estate. However, the recipient will receive the couple’s $1 million basis, resulting in almost a $300,000 capital gains tax if the assets are sold for $2 million. If the couple retains the assets until death, the recipient will get a step-up in basis to $2 million and will pay no capital gains tax if the assets are sold for that price.

Take advantage of credit for previously taxed property. If an elderly couple has a substantial estate, tax dollars can be saved by paying tax on the first death and by taking maximum advantage of the estate tax credit for tax on prior transfers.

  • If each of their estate plans uses a credit shelter trust, they should name each other mandatory income beneficiary.
  • Use the marital deduction in qualified terminable interest property (QTIP) trust form so the executor of the estate of the first to die can elect to deny the marital deduction in full or in part and create a taxable estate.
  • The spouse-beneficiary should be given a 5% right of withdrawal on trust corpus.
  • The six-month extension to file the federal estate tax return should usually be taken to better assess when the second death might occur.