Estate Planning for Short Life Expectancies

1. Estate Planning for Short Life Expectancies Presented by Gary Altman ALTMAN & ASSOCIATES Estate, Legacy and Business Planning

2. Planning for Short Life Expectancies • All elderly or terminally ill individuals • Single, elderly or terminally ill individuals • Assets < $5,490,000 • Assets > $5,490,000 • Married couples, elderly or with Elderly or Terminally ill spouse • Assets < $5,490,000 • Assets > $5,490,000 • Surviving Spouse, not U.S. Citizen

3. Elderly or Terminally ill Individuals • Planning for the elderly or terminally ill utilizes basic & specific strategies

4. Basic Strategies for all Elderly or Terminally ill Individuals • Documents to Create/Review/Update • Advance Medical Directive • HIPAA Release • Power of Attorney • Will • Trust(s)

5. Basic Strategies for all Elderly or Terminally Ill Individuals • Assets must fit the estate plan • Double-check the following: • Beneficiary designations • Title of property (e.g. joint) • Location of assets • Avoiding ancillary probate (e.g. timeshares) • Property Values

6. Specific Strategies for all Elderly or Terminally Ill Individuals • Gifting • One of the most common used strategies to remove assets from an individual’s estate • What is a completed gift? • Section 25.2511-2(b) of the Gift Tax Regulations provides that a gift is complete when the donor has so parted with dominion and control as to leave in him no power to change its disposition, whether for his own benefit or for the benefit of another • Gifting techniques will be discussed throughout. However, remember that an incomplete gift from the donor will be valued as part of the donor’s estate at death • For example: • Checks must clear prior to donor’s passing, otherwise included in taxable estate • Suggestion: Use cashiers check or cash • Deliver necessary documents (e.g. deeds) prior to donor’s passing

7. Specific Strategies for all Elderly or Terminally Ill Individuals • Income Tax Issues • Charitable Gifts v. Charitable Bequests • Charitable Gifts provide an income tax deduction • If estate < $1 million, charitable gift is preferable to reduce income tax liability • Charitable Bequests provide an estate tax deduction • If estate > $1 million, charitable bequest may be preferable to reduce estate tax liability if such savings is greater than income tax savings • Consider accelerating income to client’s last income tax return • Requires: change in documents to remove charitable bequests in will • Charitable IRA Bequest provides both an estate and income tax deduction

8. Specific Strategies for all Elderly or Terminally Ill Individuals • Income Tax Return • Savings Bonds • Realize some (or all) interest on final income tax return • Accrual Method • Individual responsible for filing final federal income tax return for the year of death will include interest earned in the year of death • Cash Method • Individual responsible for filing final federal income tax return for the year of death may elect to report all interest earned on the bonds up to the date of death. • If election not made, interest becomes IRD and is carried over to beneficiary until Bond liquidated. • Deduction against taxable estate • Avoids double tax • Roth IRA • Convert current after tax dollars or existing retirement plans into a Roth IRA • Allows for tax-free growth and distribution to heirs, tax-free

9. Specific Strategies for all Elderly or Terminally Ill Individuals • Avoiding state estate tax in 2019 • Gifting when estate is > $5,490 million (NY estate tax exemption) • Helps avoid state death taxes • Avoid the NY estate tax “cliff” • Amounts to Gift • $15,000 per individual, to as many individuals as desired • Tax free • Reduces taxable estate • Can give up to Federal gift tax limit and still have the 5,490 million dollar New York exemption at death • Be careful about basis issues

10. Specific Strategies for all Elderly or Terminally Ill Individuals • Gift splitting between Spouses • Section 2513 provides that a gift made by one spouse to any person other their spouse can be considered as made one-half by each spouse. • If no tax is owed, only the donor spouse is required to file a gift tax return. • If tax is owed, both spouses must file a gift tax return. • If gift tax paid by donor’s spouse, gift tax not included within donor’s estate even if within 3 years of death. • Can also elect to split gift after death

11. Specific Strategies for all Elderly or Terminally Ill Individuals • Death Bed Gifting • Often individuals will seek to make last minute gifts from their estate in advance of impending death. • What assets are being gifted • More complex gifts provide more complex issues • Cash is always the simplest form of gifting • Gifts usually made within 2 or 3 years of a person’s death are often considered death bed gifts • Annual exclusion gifts • Lifetime exclusion gifts • No included in estate for NY estate tax purposes

12. Specific Strategies for all Elderly or Terminally Ill Individuals • Death Bed Gifting (Cont’d) • Make sure gifts complete prior to death • Checks must be fully paid, if not fully paid prior to death, they are includable in estate. • Basis Issues • Gifts prior to death receive carryover basis • Assets held at death and not gifted receive step-up in basis

13. Specific Strategies for all Elderly or Terminally Ill Individuals • Bypass Trust & Marital Trust • We will discuss later in the context of married couples

14. Specific Strategies for all Elderly or Terminally Ill Individuals • Review Life Insurance Policies • Failure to designate beneficiary creates default beneficiary of decedent’s estate • Life insurance owned by individual at death is includable in estate valuation • How to remove Life Insurance value from estate? • Do Not gift • Sell policy

15. Specific Strategies for all Elderly or Terminally Ill Individuals • For those clients with significant wealth consider complex techniques: • Fractionalize Real Estate and Business Interests • Minority ownership in assets upon death is subject to a discount and thus can decrease estate value and ultimately estate tax liability • Consider gifting fractional interests in the amount of the annual exclusion (currently $15,000) • Create a Family Limited Partnership (“FLP”) • Asset transfer to FLP creates immediate fractional interests based on ownership of FLP. • Easier way to facilitate fractional gifting

16. Single IndividualsAssets Over $5,490,000

17. Single Individuals Assets Over $5,490,000 • Gifting may help avoid state estate taxes • Be Careful • Gift Assets with High Basis • Assets with low Basis will received step-up in basis upon death. • Beware of Death Bed Gifts, make sure they are complete • Amounts to Gift • 2019: $15,000 per individual, to as many individuals as desired • Tax free • Reduces taxable estate • Also can give up to Federal gift tax exemption limit and still retain the New York $5,490,000 exemption at death

18. Married IndividualsAssets Over $5,490,000

19. Married IndividualsAssets Over $5,490,000 • Gifting in 2019 to take advantage of current economic climate(e.g. when your basis in asset > FMV) • Again, gifts should be of High Basis assets • Assets retained that are Low Basis get a step-up at date of death • Sell the asset & recognize loss on last income tax return • Gift the asset, then donee gets a floating basis, will only recognize future gain up to donor’s original basis • Use losses against income or gains from Savings Bonds, IRA’s, Annuities, etc.

20. Married IndividualsAssets Over $5,490,000 • Gifting in 2019 to take advantage of current economic climate(e.g. when your basis in asset > FMV) • Larger assets, even if payment of gift tax required • Gift allows donee to retain donor’s higher, original basis in the asset • Donee can sell asset without being taxed on any gain, unless the gain exceeds the donor’s basis • Bequests, which result in lower, FMV basis being set • Can’t recognize capital loss

21. Married IndividualsAssets Over $5,490,000 • When your basis in asset < FMV • Transfer title in all assets to sick spouse (“Death Bed Gift”) • Sick spouse bequeaths property to surviving spouse (or others) • Survivors take advantage of stepped up basis, so upon sale of asset, taxable gain is reduced • 1 year rule • Can’t go back to sick spouse • If bequeath assets to trust for spouse, then will receive new basis at death

22. Married IndividualsAssets Over $5,490,000 • Planning to maximize use of current federal exemption • Bypass Trust & Marital Trust • NY QTIP Planning

23. Married IndividualsAssets Over $5,490,000 • Planning to maximize use of current federal exemption • Bypass Trust • Created to utilize sick spouse’s full federal exemption • Created to utilize New York Estate Tax exemption and decrease New York Estate Tax liability • Passes free of estate tax at second spouse’s death • Asset protection + discretionary distribution of principal and income to surviving spouse • Assets can grow without additional estate tax • Funding Tip: gifting to sick spouse (“Death Bed Gift”) will enable him or her to more fully utilize the higher estate exemption amount

24. Married IndividualsAssets Over $5,490,000 • Planning to maximize use of current federal exemption • Marital Trust • Balance passes in trust to spouse • Not taxed in sick spouse’s estate, i.e., not taxed when first spouse dies • Included in surviving spouse’s estate at death • Prior Tax Credit • If both spouses are old or sickly, then may want to draft to obtain a prior tax credit at second death • Create income trust for surviving spouse, possibly with 5 and 5 power • Do not elect marital deduction, instead pay estate tax

25. Married IndividualsAssets Over $5,490,000 • New York Planning Options $5,490,000 state estate exemption) • Portability for balance over NY exemption limit • NY QTIP Trust

26. Married IndividualsAssets Over $5,490,000 • New York Planning Options $5,490,000 state estate exemption) • Portability • All assets pass to surviving spouse via marital deduction • Deceased spouse’s executor elects to give surviving spouse right to use remainder of deceased spouse’s exemption • i.e. Executor files federal estate tax return and elects portability • If assets gifted by surviving spouse in an amount that does not exceed the combined federal exemption, then can avoid state estate tax at surviving spouse’s death

27. Married IndividualsAssets Over $5,490,000 • New York Planning Options $5,490,000 state estate exemption) • If assets a significantly less than federal exclusion + surviving spouse does not want to gift significant assets, there is another option • Involves Bypass & QTIP Trust

28. Married IndividualsAssets Over $5,490,000 • Bypass Trust • Depending on the Individual estate plan, surviving spouse may receive assets in a Bypass Trust or, may have ability to disclaim assets to a Bypass Trust • Funding will occur with an amount limited to the state estate tax exemption • Remaining federal exemption can be used by surviving spouse via portability

29. Married IndividualsAssets Over $5,490,000 • NY QTIP Trust • Amount up to Estate Exemption Funds Bypass Trust • Amount not in Bypass Trust funds a NY QTIP Trust which qualifies for the NY marital deduction • Surviving spouse may assign income interest to descendants, which will likely constitute nontaxable gifts (for Federal gift tax, since the NY QTIP is already not part of surviving spouse’s estate) • Surviving spouse still entitled to discretionary principal distributions • Results in NY QTIP amount not being included in survivor’s taxable estate • Other ways for NY QTIP not to be included in surviving spouse’s Estate • Surviving Spouse spends down QTIP funds • Surviving Spouse moves out and establishes domicile elsewhere • Surviving Spouse purchases home, gifts home to children and pays rent from the MD QTIP • NY QTIP – preserves GST exemption for first spouse to die • Alternatively, can use a reverse QTIP election • NY QTIP also provides creditor and nursing home protection

30. MarriedAssets Over Current Federal Exemption

31. MarriedAssets Over Current Federal Exemption • Avoid estate taxes using Bypass & Marital Trusts • Clients with Significant Wealth Need Complex Estate Planning. • Reliance on portability not recommended because not take full advantage of GST exemptions • Also not protected from future second marriages

32. MarriedAssets Over Current Federal Exemption • Charitable Lead Annuity Trust • Why? Currently, low hurdle rates • Especially beneficial if donor has used all/most of gift tax exemption & the assets have high appreciation rate • Remainder passes to heirs with significantly reduced estate or gift taxes • Negative: Beneficiaries receive significantly less of a distribution due to intervening distributions to charity

33. MarriedAssets Over Current Federal Exemption • Using prior tax credits • Bypass trust to shelter first spouse’s exemption amount • Transfer percentage of remaining amount to surviving spouse using a QTIP Trust, but do not elect QTIP treatment • Pay estate tax on amount in QTIP Trust • The QTIP Trust not subject to estate tax when surviving spouse dies • If surviving spouse dies within 10 years, there will be a prior tax credit for the tax paid on QTIP Trust assets, that may be used to reduce the estate tax in the surviving spouse’s estate • If prior tax credit is reduced by 20% for ever 2 years the surviving spouse lives after the death of the first spouse

34. MarriedAssets Over Current Federal Exemption • Gifts • Gifts of significant assets will remove those assets from taxable estate while estate and gift tax exemption amounts are still high • Can be considered a Will “advancement” and therefore ultimately subject to lower transfer tax rate (e.g. if you gift when the tax rate is lower than what the estate tax rate will be at death) • Revise documents if advancements are made!

35. MarriedAssets Over Current Federal Exemption • Gifts via annual exemption amount • Gift splitting (as explained above): • Allows you and spouse to make a $28,000 gift to any individual, tax free, and to as many individuals as you would like • If lifetime exemption already used, consider that the gift tax has recently increased to 45% • Beware of Death Bed Gifts, make sure they are complete

36. Common Pitfalls of Late Stage Planning

37. Common Pitfalls of Late Stage Planning 1. Is your client of “Sound Mind”? • Your client may want or need to plan, but do they possess the capacity to do so. • Elderly or Terminally individuals suffer from a number of disabling conditions. • Dementia • Alzheimer’s • Parkinson’s • Cancer • ALS • Many many more

38. Common Pitfalls of Late Stage Planning, cont’d • Advanced Age, Disability, or Illness does not automatically make one of un-sound mind • The Key: • Does the individual possess sufficient mind to understand, in a reasonable manner, the nature, extent, character, and effect of the particular transaction in which they are engaged? • Therefore, Diagnosis ≠ Incompetency • Maryland Standards (2 Doctors, etc.) • Lucid Moments

39. Common Pitfalls of Late Stage Planning, cont’d 2. Planning by Power of Attorney • Does Individual have valid Power of Attorney? • Does Power of Attorney have provisions to allow execution of Trusts, financial transfers, gifts, and various other estate planning measures? • Avoid actions not permitted by Power of Attorney • Could cause litigation • Could impact family harmony • Will cause delay and undue expense for estate and trust administration

40. Common Pitfalls of Late Stage Planning, cont’d 3. Death Bed Gifting • Annual Exclusion • Lifetime Exclusion • Make sure gifts are “complete” prior to death • Checks must be paid out by bank • Cashier’s checks are completed gifts • Transfers of assets must already be in donee’s name • Intent is not enough for a completed gift • Failure to complete gift = Inclusion in estate

41. Common Pitfalls of Late Stage Planning, cont’d 4. Failure to Consider Family Dynamics • Is the subject individual: • Single • Married • Divorced • Domestic Partner • U.S. Citizen • Who are the immediate and extended family members? • Minor children or Grandchildren • Disabled children or Grandchildren

42. Common Pitfalls of Late Stage Planning, cont’d • Does the family get along? • Will they all agree to a course of action? • Will children, siblings, or others challenge actions taken? • Where do family members reside? • Could cause issues if Agent for subject individual is located out of the area • Example • Subject individual is married • Marriage is second marriage • Both subject individual and spouse have children from prior marriages • Second spouse is Power of Attorney • Who should gifts be made to? • Do both families get along? • How are the assets titled? • Avoid Family conflict as much as possible!

43. Common Pitfalls of Late Stage Planning, cont’d 5. Undue Influence • Is the subject individual always being unduly influenced? • Maryland does not have a set definition, however, consider these factors in determining whether your client is being unduly influenced by a beneficiary: • The benefactor and beneficiary are involved in a relationship of confidence and trust • The will contains substantial benefit to the beneficiary • The beneficiary caused or assisted in effecting execution of will • There was an opportunity to exert influence • The will contains an unnatural disposition • The bequests constitute a change from a former will • The donor/testator was highly susceptible to the undue influence.

44. Common Pitfalls of Late Stage Planning, cont’d 6. Portability Pitfalls • Portability does not avoid state estate tax if assets bequeathed to surviving spouse remain in surviving spouses estate at death. • Portability does not preserve the gst exemption (Use It or Lose It) • Portability preserves exemption amount. Surviving Spouse can gift the DSUEA exemption amount as they so choose

45. Common Pitfalls of Late Stage Planning, cont’d 6. Portability Pitfalls (Cont’d) • If the surviving spouse remarries and outlives the second spouse, portability of first spouses estate is lost. Therefore surviving spouse should utilize DSUEA exemption prior to second marriage • Second Marriages (Second spouse can take advantage of deceased spouse exemption despite length of marriage) • Creditors

46. Common Pitfalls of Late Stage Planning, cont’d 7. Change of Residence • Different states in the area have different estate tax laws • Movement between states to establish residence and avoid estate taxes is a dangerous proposition

47. Common Pitfalls of Late Stage Planning, cont’d 8. Self-Guided Transactions • Actions taken without the advice of a knowledgeable source (i.e. estate attorney, financial planner, etc.) can result in mistakes. • Mistakes may need to be reversed • Tax consequences • Increased costs and liabilities • Could cause hindrance to post-death administration • Actions may not match estate planning documents • Family harmony may deterirorate

48. Late Stage Planning and Post-Death Administration • Make sure late-stage planning is in harmony with the contents of the subject individuals estate planning documents • If the two do not match, post-death administration could be a nightmare • Actions taken in violation of the Power of Attorney could cause discontent and disagreement among beneficiaries leaving the Personal Representative in a precarious position. • Transparency is imperative. • Make sure all beneficiaries know what steps are taken so that there are no surprises.

49. Late Stage Planning and Post-Death Administration • Estate Tax Return • Keep records of everything done • Failure to account for late stage planning on the Estate Tax return could result in interest, penalties, and numerous hours and expenses to amend or change the return.

50. Thank You! • Questions? • Comments? • Next Steps? One Central Plaza 11300 Rockville Pike, Suite 708 Rockville, MD 20852 Tel: 301-468-3220 Fax: 301-468-3255 gary@altmanassociates.net www.altmanassociates.net 30 Corporate Center 10440 Little Patuxent Parkway Suite 300 Columbia, Maryland  21044