Someone close to you has little time left in this world. What can you do? You want to do everything you can for them. You watch helplessly as they fight what you both know is a losing battle. The doctors have already written the final chapter in the story.
You stay with them to brighten their days, helping to bring joy and even levity into their lives. But, you want to do more. Perhaps they are concerned about those left behind. You can help allay their concerns by seeking out the advice of an attorney focusing on estate planning, even if they already have an estate plan.
There are planning strategies that can be taken advantage of even when time is short. These include:
- Annual Exclusion Gifting. Each of us can give up to $12,000 per year (beginning in 2006) to anyone we want, without using our lifetime gift tax exclusion. We can give this amount to whomever we want. However, if we do not use it, the following January 1, it is lost. Further, at our death it is lost. Let’s say Grandma has 5 children, 20 grandchildren, and 5 great-grandchildren. Let’s say that 5 children and 10 grandchildren are married. Grandma could make gifts to each of them, for a total of $12,000 x 50, or $600,000 per year. This is an easy way to reduce the estate subject to taxation. If desired, the gifts could be made to a trust for the benefit of the beneficiaries, in order to retain control.
- Fractional Interests. Typically, when death is near, it is too late to do discounting of assets remaining. Family Limited Partnerships and similar strategies tend not to work well when initiated at that late hour. However, it is simpler and safer to give a small interest in business assets and real property other than the personal residence. A tenant in common interest in realty gets a discount of 10%-25%, not just of the interest gifted, but also of the interest remaining.
- Charitable Giving. If they are interested in charitable giving, doing so shortly before death is more powerful than doing so after death. Before death the gift will also qualify for a charitable income tax deduction, reducing income taxes as well as estate taxes.
- Income Tax Basis. We all have a basis in property we own. Typically it is what we paid for it, adjusted by depreciation or improvements. However, at our death, the basis is changed to the value at the date of our death. Typically, this increases the basis, thus avoiding capital gains on the increase. However, sometimes we have property that has declined in value. If we continue to hold that property until death, the basis gets reduced, meaning we would never get the benefit of the tax loss on the property. So, if someone is close to death, it is wise for them to sell assets that have large losses.
- Roth IRA. With traditional IRAs or 401k plans, there is a built in income tax liability because they have never been subject to income taxation. Unfortunately, for those with an estate large enough to face taxation, there is no discount for estate tax purposes for the inherent income tax liability in the asset. However, if your income is below $95,000 ($100,000 for a married couple filing jointly), you can convert your IRA to a “Roth IRA.” By doing so, you subject the IRA to income taxation, but it escapes income taxation when withdrawn. Basically, this avoids the estate taxation on the income tax liability.
As time draws near, it is wise to consult with a qualified estate planning attorney. Such an attorney will review the estate plan and consider strategies such as those outlined in this article. The estate plan review and strategy implementation can help effectuate the ill person’s wishes, while saving money in the process.
Ronald “Chip” Morrison, Jr. is a Board-Certified Specialist in Estate Planning and Administration by Louisiana Board of Legal Specialization and a member of the American Academy of Estate Planning Attorneys. He has been engaged in Louisiana trusts and estate law for the last 17 years. Our firm serves clients throughout southern Louisiana. To learn more about how you can achieve your estate planning goals, please call (504) 831-2348 or visit our website at www.morrisonlawplc.com.