If you (or a loved one) are approaching end of life, you may need to act quickly to prevent unnecessary expenses to your estate.
Planning provides peace of mind for both you and your family.
Here are some of the key considerations:
1. Prepare for Incapacity
Check the language of your durable power of attorney for financial matters to ensure that it is immediately effective, and that your plan can be implemented without obtaining a doctor’s letter later to certify that you are incapacitated. This will ensure that your agent can assist you as soon as you need help.
2. Avoid Probate and Complete Any Required Funding
Planning to avoid probate upon death may require a Revocable Living Trust. In order to be effective, the trust must not only be put into effect, but it must also be funded by transferring record title of real property, bank accounts and investment accounts into the trust. Failure to fund may result in a full or summary probate proceeding such as a petition to transfer the assets into the trust.
You should confirm that all beneficiary designations for life insurance, retirement and all annuities are completed. Failure to complete beneficiary designations for retirement accounts such as IRAs, 401(k)s, 457s and 403(b)s are particularly problematic as that may trigger unnecessary probate costs, accelerated income tax, and cause income to be taxed at a higher rate.
3. Consider Swapping Assets
Consider transferring appreciated assets with a low income basis to obtain a step up in income tax basis upon your death and transferring depreciated assets away to avoid a step down in income tax basis.
Consider implementing any desired charitable gifts during your lifetime if your estate is not subject to estate tax. Your lifetime exemption for estate tax purposes is $5.45 million, if you’re single, and $10.9 million for a married couple. Charitable gifts at death provide no estate tax savings for smaller estates. On the other hand, charitable transfers or gifts made during your lifetime may yield a substantial income tax savings even for the smaller estates.
5. Identify and Review Existing Life Insurance Policies
Confirm that all life insurance policies are paid and that policies have not lapsed. Reinstatement may still be possible prior to death. For a taxable estate (in excess of $5.45 million for singles or $10.9 million for married couples), consider selling the life insurance policy to an irrevocable life insurance trust (ILIT). You may even be able to stop or reduce payments due to life expectancy if the cash value is adequate.
6. Plan to Avoid Income in Respect of the Decedent (IRD)
For taxable estates, you may be able to avoid income in respect of a decedent (IRD) items, which include wages, individual retirement account distributions and other income that may be paid after death. IRD items are subject to both estate tax and income tax. While a deduction is available for income tax purposes, estate tax paid does not provide dollar for dollar protection. Note also that the estate tax deduction for the calculation of the income liability is often overlooked.
The steps taken to avoid income in respect to the decedent depend upon the type of income or item. For example, a Roth conversion or even an accelerated distribution from a retirement account may be appropriate if the decedent’s marginal income tax rate is lower than the beneficiary’s marginal tax rate. IRD may be avoided by transferring the IRD asset to the surviving spouse. Deferring receipt of retirement benefits will postpone receipt and tax of the IRD income. Careful planning may allow the beneficiaries to stretch the receipt of the benefits over the beneficiary’s life expectancy. Estate tax can be avoided by transferring the IRD asset to a charity in the estate plan. Careful planning is needed which should include the financial advisor and the tax advisor.
This is not intended to be an all-inclusive list of the issues to be considered for planning at the end of life. Each person’s situation in unique.
Reference: 6 Estate Planning Tips for Those Approaching Death, Nasdaq, July 26, 2016.