Estate planning lawyers agree that there has been a fundamental shift in their clients’ estate planning concerns over the last couple of decades. There has been less worry about estate tax minimization and more concern for income tax minimizations and other valuable planning ideas. Thankfully, there are things that can be done with an estate before and after your loved one passes away that can add value to an estate for them as they age as well as for their heirs.
Tips for Aging Loved Ones
If you are going over your elderly’ loved one’s estate plan, there are some important items that you should review or look out for in their estate. These issues can include:
Watching for Lack of Capacity
Your loved ones can lose mental capacity as they age, and it is important for the purposes of estate planning that you monitor their ability to make rational decisions on their own. It is important to update estate planning documents while they can still articulate them and not be challenged later for a lack of capacity.
Exercising Swap Powers
Many irrevocable trusts include a right for the person who sets up the trust to exchange assets outside the trust for assets in the trust. If highly appreciated assets are transferred back into the trust before death, the tax basis is stepped up at the date of death.
Review Principal Trust Distributions
While most trusts pay out income to beneficiaries, some trusts also allow for the payment of the principal. There are pros and cons to this type of trust structure, and you should review it with your loved one and an attorney to decide if this is the best setup for you loved one’s assets.
Shift Timing of Charitable Gifts
Only estates that are taxable can benefit from an estate tax charitable contribution gift. If you review the estate of your loved one and know that they are below the estate tax exemption level, you should prepay charitable bequests while they are alive so that they can qualify for income tax deductions. However, you should also get it in writing from the charity that the donation is a prepayment of the bequest under the will so that it is not paid double at death.
Amend any Limited Partnerships
This applies if the limited partnership is also a family limited partnership. In the past, family limited partnerships were formed to provide tax valuation discounts. However, at current exemption levels, this type of partnership may not help so much as hurt. Because the discount could reduce the basis step-up on death and cause higher capital gains taxes when a sale is made in the future, it is important to review them now.
Trust Situs
The situs of the trust is the state where it is based and subsequently dictates the governing law. However, now more than twenty states permit “decanting” of trusts where one trust can be merged into another. As a result, it is becoming increasingly important to draft trusts with provisions permitting a change in situs and governing law.
Tips for After the Passing
In addition to looking out for an estate before a loved one passes, you should also keep in mind what is important after they pass away. There are many different opportunities available to ensure that the heirs of the estate also get as much value as possible that their loved one wished to pass on. Issues that can arise after the passing of a loved one can include:
Executor Commissions
Traditionally, it has been commonplace for a family member to take executor commissions. The commission provided a valuable estate tax deduction for estates taxed at higher rates. However, with the exemption level eliminating estate taxes for most people, paying executor commissions may generate a significant income tax for the executor without reducing any estate tax. Once reviewed, if it does not make sense to take a commission, the executor can formally waive receiving any money for the responsibility.
Unfunded Trusts
Although it is constantly warned against, many people do not revise their will for years. Some older estate plans include funding a credit shelter trust on the first spouse’s death, but many families do not want to do it if the estate tax benefit no longer exists. Some even go so far as to attempt to distribute the assets outright to the named beneficiaries and skip the trust. However, you need to legally address the termination or nonuse of the trust before making distributions in order to avoid legal ramifications.
Funding Bequests or Appreciated Assets
If your loved one attached a dollar figure in a bequeathing that is met using appreciated assets, a taxable gain can be triggered at distribution. As a result, you should be careful when deciding what assets should be sold in order to fund specific bequests.
Asset Distributions
While many wills and estate plans provide for the equal distribution of assets to heirs, sometimes the beneficiaries would much prefer to receive non-pro rata distributions of various assets in the estate, as long as they are of equivalent value. For example, one heir may want to inherit the family home, while other heirs receive their portion in stocks and financial assets. However, you should be aware that unless the will or state law permits non-pro-rata distributions, the IRS may view this as the equivalent of a sale and an exchange of the various assets, so be sure to review the documents and law before executing an estate in this manner.