Pre- and Post-Mortem Planning

By:
Elana S. Bronson, Esq.
Published Date:
Jan 1, 2017

When a client is nearing the end of his or her life, advisors should be aware of both pre- and post-mortem planning opportunities. While the majority of this article will focus on tax planning techniques, there are also practical considerations. This article is not exhaustive, but is intended to serve as a helpful guide for practitioners. 

Pre-Mortem Planning

Practical Considerations

  • Financial power of attorney.  Make sure the client has an up-to-date financial power of attorney, including—for New York residents—statutory gifts rider, a statutory gift that grants authority to make annual exclusion gifts, pay medical and educational expenses for family, fund the client’s revocable trust, and make gifts to the client’s insurance trust.    
  • Health care proxy and living will.  Make sure the health care proxy and—if desired—living will are up to date.
  • Beneficiary designations. Review all beneficiary designations (e.g., retirement accounts, life insurance, bank accounts) to make sure the appointments are consistent with the client’s estate plan.
  • Life insurance.  Make sure all premiums are paid when due.  
  • Wills and Revocable Trusts.  Review the client’s will and revocable trust to ensure they are up-to-date.  Consider establishing and funding a revocable trust to simplify estate administration.  At a minimum, consider transferring to the revocable trust (i) out-of-state real and tangible personal property to avoid ancillary probate and (ii) sufficient assets to cover six months of estate expenses so the trustees can pay ongoing expenses after the client’s death. 
  • Passwords.  Ask the client to prepare a list of all passwords to ensure a smooth estate administration. 
  • Cash needs of family. The client’s individual accounts will be frozen on death and inaccessible to family until letters testamentary are issued. If the client is married, consider transferring cash to the spouse to cover expenses. Alternatively, a revocable trust could be prefunded with sufficient assets to cover expenses for a certain period of time. 
  • Begin the process of identifying the client’s assets.  Make sure the client has an up-to-date balance sheet. If possible, the client should also begin compiling three years of bank and brokerage accounts, which will be reviewed in preparing the estate tax return.         

Gift tax planning

In order to reduce the client’s taxable estate, the client should consider making gifts of high-basis assets that will not generate gift tax. This includes making annual exclusion gifts and paying medical and educational expenses directly to service providers under IRC section 2503(b) and (e). A client can also prepay tuition for an individual who is already enrolled in a school without any gift tax implications, provided the client does not retain any right to be reimbursed—for example, if the student drops out or the actual tuition is less than the prepaid amount.

Finally, if a client lives in a state that (i) imposes an estate tax and (ii) does not bring gifts back into the estate in calculating the state estate tax, the client might consider making taxable gifts up to the federal—and, if applicable, state—gift tax exemption in order to reduce the state estate tax. This technique, however, will not currently work for a New York domiciliary as taxable gifts made (i) between Apr. 1, 2014 and Dec. 31, 2018 and (ii) within three years of death will be added back into the New York estate under New York tax law.  

Pre-mortem income tax planning

Losses. A client nearing the end of his life should harvest losses as they will not carry forward after his death, and property in a loss position will receive a step-down in basis for estate tax purposes. If the client is married and does not have sufficient gains to offset the losses, it might be appropriate for the spouse to realize gains or for the client to give the spouse the depreciated property to avoid the step-down at death—see IRC section 1041(b).

Plan for basis step-up. Defer sales of appreciated property until after the client’s death, if appropriate. If the client’s spouse has low-basis assets, consider transferring those assets to the client. If, however, the client dies within one year of receiving the property from the spouse and the spouse receives the property back on the client’s death, the step-up will be denied—see IRC section 1014(e). It is unclear whether a gift to the spouse in trust would be captured by this rule.

If the client has created grantor trusts, consider exchanging low-basis assets from the grantor trust for cash or other high-basis assets.

If the client is a beneficiary of a trust, consider distributing low-basis assets to the client, particularly if the client does not have a taxable estate.

Timing of income. It might be appropriate to defer or accelerate income or deductions.

Post-Mortem Planning  

Final income tax return.  A final income tax return must be filed for the decedent covering the period that ends with the date of death. The following is a list of common considerations in preparing the final income tax return.

Joint or separate income tax return.  If the decedent was married at the time of his death, a joint return can be filed so long as the surviving spouse does not remarry before the end of the surviving spouse’s tax yearsee IRC section 6013(a)(2). Considerations in deciding whether to file a joint or separate return include:

  • relative tax liability
  • availability of excess losses to offset spouse’s gains
  • ability to use deductions—deductions for medical expenses can only be deducted for income tax purposes to the extent they exceed 10% of AGI.  If the spouse has more income, the deduction might be more valuable on a separate return. 

Medical expenses.  Medical expenses paid within one year of death are treated as being paid by the decedent at the time incurred under IRC section 213(c). As a result, such expenses can be claimed on either the decedent’s final income tax return as a medical expense or on the estate tax return as a debt of the decedent. If the estate is not taxable, the expense should be claimed for income tax purposes so long as doing so will not generate a taxable estate. In addition to considering relative tax rates, remember the estate is not subject to the 10% floor mentioned above.

Estate tax planning.  The following techniques might reduce the estate tax liability.

Alternate Valuation.  Under IRC section 2031, if it will result in a reduction of the value of the gross estate and the estate taxes, the executor can elect to have the assets valued on the alternate valuation date (the earlier of six months from death and the date an item is disposed of) instead of the date of death. If elected, the alternate valuation date applies to all assets other than those whose value changes merely by the lapse of time (e.g., patents, life estates, remainders, reversions and accrued interest on bonds).

Estate administration expenses.  Most estate administration expenses can be claimed either as deductions for estate tax purposes or income tax purposes. Considerations in deciding where to claim the deduction include:

  • relative tax savings
  • timing of the payment of the expense
  • For estate tax purposes, a deduction can be claimed so long as the expense is ascertainable with reasonable certainty and it will be paid.
  • For income tax purposes, the expense can be claimed only in the year in which it is paid.
  • ability to carry out the estate’s final tax year expenses to beneficiaries
  • no 2% floor on itemized deductions for estate tax purposes
  • a taxable estate resulting from claiming the expense on the income tax return

Commissions. Consider whether it will be more tax efficient to take commissions—which will be subject to ordinary income tax for the fiduciary but will be deductible for the estate—or to waive commissions, which will increase the estate passing to the beneficiaries.

Deferral of estate taxes.  A deferral of estate tax payment is available under IRC section 6166 if the estate holds closely held businesses whose value exceeds 35% of the gross estate. The deferral is generally available based on the proportionate value of the closely held business to the gross estate.  The deferred taxes can be deferred for up to five years and can thereafter be paid in up to ten installments.

Qualified disclaimers. Qualified disclaimers allow the beneficiaries to revise the estate plan after death without gift tax consequences, but be careful of the timing for disclaimers of interests in joint property.  A qualified disclaimer might be used to take advantage of the estate tax exemption—to provide for charity or to shift high-basis assets to a non-spouse.

Selection of Estate’s Fiscal Year

The estate can select a fiscal year ending within one year of the decedent’s death. Because an estate does not pay estimated taxes for two years, choosing a fiscal year ending in the month prior to death might be beneficial. Alternatively, because a beneficiary of the estate is deemed to receive his share of the estate’s income on the last day of the estate’s fiscal year, regardless of when the income is actually distributed, it might be beneficial to pick a fiscal year that shifts income into subsequent years.    



Elana Bronson, Esq., is a senior attorney at Cleary Gottlieb Steen & Hamilton LLP. Her practice focuses on individual clients and charitable organizations. Her work includes matters relating to domestic and international estate, gift and income tax planning; tax and property law aspects of trusts and estates; estate administration; closely held businesses; and matrimonial matters. Elana is a member of the New York City Bar Association’s Committee on Estate and Gift Taxation.
Elana Bronson, Esq., is a senior attorney at Cleary Gottlieb Steen & Hamilton LLP. Her practice focuses on individual clients and charitable organizations. Her work includes matters relating to domestic and international estate, gift and income tax planning; tax and property law aspects of trusts and estates; estate administration; closely held businesses; and matrimonial matters. Elana is a member of the New York City Bar Association’s Committee on Estate and Gift Taxation.
Elana Bronson, Esq., is a senior attorney at Cleary Gottlieb Steen & Hamilton LLP. Her practice focuses on individual clients and charitable organizations. Her work includes matters relating to domestic and international estate, gift and income tax planning; tax and property law aspects of trusts and estates; estate administration; closely held businesses; and matrimonial matters. Elana is a member of the New York City Bar Association’s Committee on Estate and Gift Taxation.
Elana Bronson, Esq., is a senior attorney at Cleary Gottlieb Steen & Hamilton LLP. Her practice focuses on individual clients and charitable organizations. Her work includes matters relating to domestic and international estate, gift and income tax planning; tax and property law aspects of trusts and estates; estate administration; closely held businesses; and matrimonial matters. Elana is a member of the New York City Bar Association’s Committee on Estate and Gift Taxation.Elana Bronson, Esq., is a senior attorney at Cleary Gottlieb Steen & Hamilton LLP. Her practice focuses on individual clients and charitable organizations. Her work includes matters relating to domestic and international estate, gift and income tax planning; tax and property law aspects of trusts and estates; estate administration; closely held businesses; and matrimonial matters. Elana is a member of the New York City Bar Association’s Committee on Estate and Gift Taxation.
Elana Bronson, Esq., is a senior attorney at Cleary Gottlieb Steen & Hamilton LLP. Her practice focuses on individual clients and charitable organizations. Her work includes matters relating to domestic and international estate, gift and income tax planning; tax and property law aspects of trusts and estates; estate administration; closely held businesses; and matrimonial matters. Elana is a member of the New York City Bar Association’s Committee on Estate and Gift Taxation.
BronsonElana Bronson, Esq., is a senior attorney at Cleary Gottlieb Steen & Hamilton LLP. Her practice focuses on individual clients and charitable organizations. Her work includes matters relating to domestic and international estate, gift and income tax planning; tax and property law aspects of trusts and estates; estate administration; closely held businesses; and matrimonial matters. Elana is a member of the New York City Bar Association’s Committee on Estate and Gift Taxation.

 
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