One of the sad things about my profession is that my clients eventually die. Some deaths are sudden and unexpected, but most deaths occur after an accident or illness that makes death imminent within a few days or perhaps a few weeks. Though I am sensitive to the feelings of grief and stress that my clients and their families are experiencing, I have the unpleasant task of explaining to my clients and their families the heavy penalties they will pay to the federal and Tennessee governments if they decline to take advantage of “last minute” tax reduction opportunities.
I am currently working with one of my clients who has been given a life expectancy of 2 months or less. Because my client is likely to die in 2010, some of the planning issues are unique. However, some of the planning opportunities are the same as they would be for a death in a different year. Some of the major issues we have considered:
- Make sure all assets are owned by the Revocable Trust so that probate can be avoided. My client has done an excellent job of funding her revocable trust. However, she recently loaned some money to a friend and the Note is payable to her rather than her trust. We are doing a simple assignment of the Note to make sure that it is owned by her trust.
- Make annual exclusion gifts of $13,000. My client is making gifts of $13,000 to all of her children and grandchildren, as well as to spouses of her children. At a minimum, this will reduce Tennesse inheritance taxes. If federal estate taxes are reinstated with an effective date prior to the date of my client’s death, or, if she survives until 2011, the gifts will also reduce federal estate taxes.
- My client is converting her IRA to a Roth IRA.
- My client’s revocable trust makes charitable bequests totaling $500,000. My client trusts her children to make these gifts. Therefore, she is amending her trust to give the money to her children. The children will pay Tennessee inheritance taxes on this bequest at the rate of 9.5%. However, they will receive charitable income tax deductions which will reduce their federal income taxes by approximately 35%. Furthermore, two of the children live in states with state income taxes. The charitable bequests will also reduce state income taxes. This plan will backfire if federal estate taxes are reinstated retroactively. If this were to happen, federal estate taxes would be higher than the income tax savings. In order to account for this possibility, the revocable trust will provide that if the children disclaim the bequest, then the bequest will go to the charities. This will allow the children to see what happens over the next nine months before they must decide whether to disclaim.
- Should appreciated assets be sold to avoid losing the benefit of a capital loss carryover? Fortunately, no sales are necessary, because the carryover basis law that applies for decedents dying in 2010 allows the unused capital loss carryover to be added to the $1.3 million basis increase. My client’s executor will have more flexibility to avoid future capital gains if the capital loss carryover is preserved.
- Finally, my client is researching her records regarding her income tax basis for several assets. She can find this information much more easily than her Executor.
Estate planning when death is imminent can reduce taxes and other problems. Even though the circumstances are unpleasant, the potential benefits are substantial. I have been told by some of my former clients and/or their families that they took comfort in their final days from the knowledge that financial matters were in good shape.