Death Bed Estate Planning Fire Drill – When a client walks into your office and informs you they have only a very short time to live, time is short and your planning options are more limited.

General Review of Client Situation

The first thing to do is what you would normally do in your periodic client review. The Trust Review Checklist is attached as Exhibit 1. In particular, ask if there is anything specific which brought the client to your office. They may have something particular in mind. More generally, review their existing documents, if any, and see what changes, if any, they want to make. Have the client’s wishes, circumstances, or assets changed significantly? Make sure beneficiary designations are as intended.

Clearly, some items will be of less importance (general durable power of attorney which ceases at death) while other items will be more important than usual (organ donation, burial instructions, etc.).

Many advanced planning strategies will no longer be appropriate to initiate, especially those focused on getting asset appreciation out of the estate. Starting an appreciation-focused strategy on the death bed is relatively worthless given the low likelihood of appreciation prior to death. Further, strategies that rely on actuarial values, such as a CRT for life, SCIN, etc., will be of very reduced value because you can no longer rely on the actuarial tables when the client is terminal (greater than 50% chance of not surviving 1 year). However, a review, including a death bed review, can be a good time to look at existing advanced planning strategies to make sure they are being implemented as anticipated. In particular, if there is an existing FLP/LLC, is the client respecting the entity? Are the filings current? Is the client using the FLP as his/her personal slush fund? While it is too late to remove all the sins, you can significantly improve the client’s chances of having a respected FLP if you can correct these issues.

However, there are many strategies that you can initiate even at the last moment.

Annual Exclusion Gifting

Perhaps the easiest and most obvious way to do deathbed planning is fully utilize any unused gift tax annual exclusions for the current year. Gifts excluded under Section 2503(b) are not brought back into the estate merely because they happened in close proximity to death.

Example: Grandma has made no gifts for the year of her death. She has 5 children, 25 grandchildren, and 10 great-grandchildren. In addition, 10 of these descendants are married. That totals 50 potential annual exclusions. 50 x $11,000 = $550,000. If Grandma died in 2004 with $2,050,000 she would have owed $249,000 in estate tax. After the annual exclusion gifting, her estate is reduced to $1,500,000, which is equal to her applicable exclusion amount. Accordingly, no tax is due.

Often, the client may not wish to benefit the descendants in exactly the distribution pattern that annual exclusion gifting would require. In the above example, Grandma may want to benefit each child’s per stirpital line equally. However, one child may have no descendants while another may have many. All of the descendants are still better off if Grandma reduces her estate and the corresponding estate tax payable. The trust or other estate planning documents can be modified to equalize for this lifetime gifting. Of course, the method of equalization will need careful consideration.

In order to utilize an annual exclusion and remove the assets from the estate of the client, the gift must become complete during the donor’s lifetime. This can be particularly problematic when the donor is on his or her deathbed. If the donor (or his or her agent with gifting powers) writes a check to make the gift, the gift is not deemed complete until the check clears. If the donor is still alive when the check clears, the gift completion relates back to the date of the gift. However, if the donor dies prior to the check clearing, the assets are included in the estate.

Example: Grandma, of Irish heritage, writes $11,000 checks to all of her descendants for St. Patrick’s Day. Grandma dies March 31. Only those checks which cleared between March 17 (St. Patrick’s Day) and March 31will carry funds out of the taxable estate.

With deeds, delivery of the deed to the donee or his or her agent results in completion of the gift. Recordation is not necessary for the gift to be complete.

Structuring Fractional Interests

At the death bed, it is typically too late to try to do FLP or FLLC entity planning. Numerous cases have held that the proximity to death is one factor tending to show that an FLP should not be respected. Recent attacks on FLPs, in cases such as Strangi and Kimbell have added uncertainty to an already perilous strategy.

In this situation, doing a death bed FLP may be worse than doing nothing at all. If the Service is successful in challenging the FLP, the full value of the underlying assets including any appreciation would be brought back into the estate. Due to the original discounting, you could actually be worse off.

A safer, cleaner approach is to fractionalize interests in property. For example, take the family farm and gift a portion to the descendants. This will qualify the gift and the remaining portion for discounts on the gift tax return and estate tax return, respectively. Note, because the fractional interest is a present interest, not a remainder interest, it will qualify for the annual exclusion if the gift is completed during life. While discounts typically are lower than with an FLP, lower-risk discounts of 10-25% are a good result.

Further, it is not necessary to make gifts to descendants to fractionalize an asset. A couple can fractionalize a property between themselves, each owning ½ the property. Also, a property could be divided with a Family Trust. Note, a gain transaction between a surviving spouse and a Family Trust will normally be a recognition event. Income tax consequences will have to be weighed against estate tax savings of fractionalization.

Example: Mary died and left $1,000,000 in a Family Trust. John is now on his death bed and has $2,000,000 all (conveniently) in a single asset, a tract of land. If he did nothing, he would pay $225,000 in estate tax after factoring in his $1,500,000 applicable exclusion remaining. John could sell an undivided ½ interest in the tract of land to the Family Trust for a 20% discount, or $800,000. Now, John has $800,000 and a ½ interest in the land, worth another $800,000. Now, John’s taxable estate is $1,600,000, resulting in a tax of only $45,000 after utilization of the applicable exclusion. This results in a savings of $180,000 in estate taxes. Note, this may be partially offset by the built-in capital gain for John’s estate and for the Family Trust due to the discounting. However, this $400,000 in built-in gain, at the 15% capital gain rate, results in $60,000 in tax. Also, this tax will not be paid until or unless there is a future recognition event. Even assuming an immediate sale of the property, there is still a net savings of $120,000 in taxes.

Charitable giving

If charitable gifting is in the client’s plans, they can get more bang for their buck if they do the gifting during life. A charitable gift will qualify for the gift tax charitable deduction, just as it would have for the estate tax charitable deduction. However, in addition, the lifetime charitable gift will qualify for an income tax charitable deduction.

Example: Grandpa has a $1,700,000 estate and wants to bequeath $200,000 to charity, resulting in no estate tax. Grandpa makes a gift of $200,000 to charity immediately prior to his death. Grandpa now has an estate of $1,500,000 and still owes no tax. However, Grandpa will now have an income tax deduction of $200,000, which he can take against his income, subject to the percentage limitations of section 170. This could save Grandpa $80,000 in income taxes, assuming a 40% combined state and federal marginal tax rate. Of course, the reduction in income taxes will result in more money being in the estate, potentially increasing estate taxes by $36,000. Even assuming the applicability of estate taxes, this still results in a net tax savings of $44,000.

Gifting for Decoupled States

Federal estate tax is based upon the taxable estate, and adjusting for gifts made before death, including bringing back into the estate any gift taxes paid during the three years prior to death. Thus, from a federal perspective, disregarding annual exclusion gifting, there is no advantage to death bed gifting.

However, states base their tax on the adjusted taxable estate, i.e. the gross estate without adjustment for prior taxable gifts or payment of gift tax. Thus, if the decedent gifts everything the instant before death, excepting the amount needed to pay the gift tax on that transfer, they can avoid state estate taxation on all but the funds retained to pay the gift tax. This can result in substantial savings of over 10% of the amount of the death bed gift.

Example of Tax Savings
Estate Tax Calculation – Death in 2004	Without Deathbed Gifts	With Deathbed Gifts
Estate Assets	$12,000,000	$ 160
Estate Deductions	0	0
Gift Tax Paid on Gifts Within 3 Years of Death	0	3,891,840
Taxable Estate	12,000,000	3,892,000
Prior Taxable Gifts (Assumed Made in 2001 and 2004)	2,000,000	10,108,000
Total Tax Base for Federal Tax	14,000,000	14,000,000
Tentative Federal Estate Tax Before Credits	6,540,800	6,540,800
State Estate Tax (Calculated on Taxable Estate Less $60,000)	1,386,800	269,168
Tentative Combined State & Federal Estate Tax	7,927,600	6,809,968
Less State Tax Credit	-346,700	-67,292
Less Unified Credit	-555,800	-555,800
Less Gift Tax Paid on All Prior Gifts	-435,000	-4,326,840
Total Combined State & Federal Estate Tax	6,590,100	1,860,036
Total Gifts Tax on Deathbed Gifts Made in 2004	0	3,891,840
	6,590,100	5,751,876

Federal Estate Tax	5,203,300	1,590,868
State Estate Tax	1,386,800	269,168
Gift Tax (From Deathbed Gifts)	0	3,891,840
Total Estate & Gift Tax	$6,590,100	$5,751,876

Savings From Deathbed Gift		$838,224

Income Tax Basis Issues

It is important to consider the income tax basis of various assets. If there are assets which have a loss, the client may wish to recognize the loss to offset other income. If the loss asset is in his or her estate at death, of course the basis will be stepped-down to fair market value. Further, if the loss asset is gifted, the donee’s basis for loss purposes is the fair market value as of the date of the gift, i.e. the loss will not benefit them. The donee’s basis for purposes of gain remains the donor’s basis. This is the worst of both worlds.

Appreciated assets should be avoided when choosing assets to be gifted for annual exclusions and other gifting. These appreciated assets should be left in the client’s taxable estate so that they get a step up in basis at the client’s death. Cash or other assets with basis at or near fair market value make ideal assets for gifting. If the client does not have a sufficient amount of such assets, the client may be able to recognize enough losses and gains to offset each other, thereby generating sufficient cash for gifting.

Example: Client has $2,050,000 and wants to make $550,000 in annual exclusion gifts to 50 beneficiaries. Assets include WorldCom stock with basis of $351,000 and fair market value of $1,000, Wal-Mart stock with basis of $1,000 and fair market value of $351,000, $200,000 in cash, and various other illiquid assets such as closely-held businesses. The client could sell WorldCom and Wal-Mart shares to raise $352,000 without income tax consequences due to the offsetting of losses and gains. The client could then use the cash on hand and the cash generated from the sale to make death bed gifts. As a result the client would avoid estate taxation without negative income taxation consequences.

Roth IRA

If the client’s adjusted gross income for the year will not exceed $100,000, the client can elect to convert a traditional IRA to a ROTH IRA. If the client has a taxable estate, this can be an excellent way to remove from the estate the income tax liability on the IRA.

Example: Mary is single and has adjusted gross income of $90,000. She has an IRA worth $500,000 and other assets worth $1,300,000, for a total estate of $1.8 million. Let’s assume debts and expenses of $121,000 for a net estate of $1,679,000. If Mary did nothing, she would have an estate tax of $80,550. If Mary converts her IRA to a ROTH IRA, she will have debt equal to the income tax liability on the IRA conversion. Without the conversion, Mary would have an income tax liability of about $15,000 assuming $15,000 in deductions and a typical profile. If she converts the IRA, she will owe approximately $194,000 in tax, an increase of $179,000. That $179,000 increase in tax will deplete the estate, resulting in a net estate of $1,500,000 and no estate tax. Of course, now Mary’s descendants will make withdrawals income tax free over their life expectancies. This strategy is particularly useful when the recipients are in high income tax brackets and will not be able to do a spousal rollover.

Exhibit 1

TRUST REVIEW CHECKLIST

Reviewing Attorney:

Date:

Client:

Trust Name/Date:

Prepared By:

Amendment(s)/Date(s):

Prepared By:

Estate Size:

Areas of Concern:

Husband Citizenship:

U.S.

Resident Alien

Non-Resident Alien

QDOT

Wife Citizenship:

U.S.

Resident Alien

Non-Resident Alien

QDOT

Previous Marriage:

Children

CLIENT DESIRES

Change of Trustees / POA Agents:

Yes

Births / Deaths Since Trust Drafted:

Yes

Changes to Beneficiary Distribution Patterns:

Yes

Special Need Child(ren):

Yes

TRUST REVIEW CHECKLIST, CONTINUED
5.	Spendthrift Child(ren):	Yes	No
a.
b.
c.
6.	Asset Protection Issues:
a.	Possible Divorce of Child(ren):	Yes	No
b.	Creditor Protection Issues:
c.	General Creditors	Yes	No
	Tax Liens	Yes	No
	Judgement Creditors	Yes	No
7.	GST Issues:
a.	Is Client Expecting Large Inheritance:	Yes	No
	GST Issues for Client	Yes	No
	GST Issues for H’s Parents	Yes	No
	GST Issues for W’s Parents	Yes	No
b.	Is Client’s Child(ren) Independently Wealthy	Yes	No
	GST Issues for Client	Yes	No
	GST Issues for Child(ren)	Yes	No
i	GST Child #1 Name:
ii	GST Child #2 Name:
iii	GST Child #3 Name:
8.	Long Term Care Concerns
a.	Is H a Medicaid Candidate	Yes	No
b.	Is W a Medicaid Candidate	Yes	No
c.	Is H a Candidate for Long Term Care Insurance	Yes	No
d.	Is W a Candidate for Long Term Care Insurance	Yes	No

TRUST REVIEW CHECKLIST, CONTINUED
SUMMARY OF EXISTING TRUST
Trust Description
1.	Current Beneficiary Distribution Pattern
	Beneficiary Name	Outright	Staggered / In Trust to Age ____	Special Needs / Spendthrift	Pot Trust (GST or Non-GST) / GST Sep. Shares
a.
b.
c.
d.
e.
2.	Type of Trust:
a.	Single	Subtrusts:
b.	Married Separate:	Non-Tax	Disclaimer	GPOA	QTIP
c.	Married Joint:	Non-Tax	Disclaimer	GPOA	QTIP
3.	Beneficiary Lapses:
	Lapses in Specific Devises	Yes	No
a.
b.
c.
	Lapses with Residual Beneficiaries	Yes	No
a.
b.
c.
4.	Funding Formula:
a.	Pecuniary:	Family	Marital	True Worth	Fairly Representative
b.	Fractional:	Family	Marital	Prorata	Pick and Choose
c.	IRC 2057 QFOBI Business / Farm / Real Estate	IRC 2032A Farm / Real Estate

TRUST REVIEW CHECKLIST, CONTINUED
5.	Distributions to Surviving Spouse
a.	Family Trust	Income	Income / HEMS	TRU	Fully Discretionary
b.	Marital (QTIP)	Income	Income / HEMS	TRU (or Income, if Greater)	Fully Discretionary
c.	HEMS from Family Trust for Dependents	Yes	Yes, Limited By Surviving Trustor’s Assets	No	No HEMS for Marital / QTIP
d.	5 x 5 Power	Family	Marital (QTIP)
e.	LPOA	Family	Marital (QTIP) Testamentary
6.	Tax Allocation Language:
a.	Hubert Language: Pay Transmission Expenses from Trust Income	12/1999 – 1/2000	Yes	No
b.	Estate Taxes Paid by Residue		Yes	No
c.	Estate Taxes Paid by Specific Devises		Yes	No
d.	Prohibition Against the Use of Trust Retirement Assets to Pay Estate Tax		Yes	No
e.	IRC 2207A – QTIP Right of Recovery	Provision in Will	Yes	No
7.	Other Trust Retirement Asset / Annuity / IRD Issues:
a.	Retirement Assets / Annuity / IRD Assets Needed to Fully Fund Family Trust		Yes	No
b.	Fractional Funding Formula:		Yes	No
c.	IRD Allocation Language		Yes	No
d.	Income and Principle Defined	UPIA/RUPIA	Yes	No
8.	GST Provisions:
a.	GST Authorizing Language		Yes	No
b.	GST Allocations Specified		Yes	No

TRUST REVIEW CHECKLIST, CONTINUED
9.	Trustee Provisions:
a.	Disability Trustees		Yes	No
b.	Trustor Comeback Provision	Usually Contained in the Definition of Incapacity	Yes	No
c.	Separate Trustee or Co-Trustee Named for the Family Trust and/or Marital Trust	Note: Issue with Children from Previous Marriage	Yes 1. Separate 2. Co-Trustee	No
d.	Provisions for Trustee Removal	1. Any Reason 2. For Cause Only	Yes	No
e.	Provisions for Replacement	1. Limited to Corporate Trustee 2. Exclude Beneficiaries	Yes Yes	No No
f.	Special Co-Trustee Provisions	Gifting / Life Insurance	Yes	No
10	Trustee Powers
a.	Either Trustor-Trustees Can Act Alone or Must Act Together	1. Act Alone 2. Act Together	Yes Yes	No No
b.	Power to Amend / Revoke
	After Trustor’s Disability		Yes	No
	After First Trustor’s Death	Family / Marital Survivor’s Trust	Yes Yes	No No
c.	Medicaid Planning	1. Remove Assets from Trust 2. Segregate Community Spouse Resource Allowance (CSRA) to Subtrust	Yes Yes	No No
d.	Gifting Powers GPOA Issue if Gifting Power is in Excess of 5 x 5 Power Without Special Gifting Co-Trustee	1. 5 x 5 Powers 2. Continue Existing Gifting Program in Excess of 5 x 5 3. Special Co-Trustee to Gift to Acting Trustee	Yes Yes Yes	No No No
e.	Change Trust Situs	Will Become Increasingly Important	Yes	No
f.	Lend / Borrow / Exchange / Deal With Estate of Trustor(s) or Trustees of Trustor(s)’s Other Trusts	Crucial Provision for Dealing with ILITs	Yes	No
TRUST REVIEW CHECKLIST, CONTINUED
11.	Other Trust Provisions
a.	Prudent Person Rule	1.Trustor 2. Related Trustee 3. Unrelated / Corporate Trustee	Yes Yes Yes	No No No
b.	Prudent Investor Rule	1. Trustor 2. Related Trustee 3. Unrelated / Corporate Trustee	Yes Yes Yes	No No No
c.	Retain Existing Trust Assets		Yes	No
d.	Hold-Back Provision		Yes	No
e.	CERCLA		Yes	No
12.	Other Estate Planning Documents
a.	Current Durable Power of Attorney for Property	Yes	No
i.	Medicaid Planning Powers	Yes	No
ii.	Gifting Powers
	Limited to 5 x 5 Power	Yes	No
	Continue Existing Gifting Program in Excess of 5 x 5	Yes	No
	Special Co-Trustee	Yes	No
b.	Pour-Over Will	Yes	No
i.	Guardians for Minor Children	Yes	No
ii.	IRC 2207A – QTIP Right of Recovery	Yes	No
iii.	Coordinated With Trust Amendment(s)	Yes	No
c.	Property Agreement (Separate or Community)	Yes	No
i.	Prenuptial Agreement in Effect	Yes	No
ii.	Agreement Properly Balances Estate	Yes	No
iii.	Has Step-Up in Basis Been Discussed	Yes	No
iv.	Has Client Moved From Community Property to Common Law State or Common Law to Community Property State	Yes	No
d.	Health Care Durable Power of Attorney Current	Yes	No
e.	Living Will / Advance Directive Current	Yes	No

TRUST REVIEW CHECKLIST, CONTINUED
13.	Retirement / Annuity Plan Documents:
a.	IRA Plan Document Reviewed	Yes	No
i.	Beneficiary Designation Correct	Yes	No
ii.	Recalculation Automatic	Yes	No
b.	Retirement Plan Document Reviewed	Yes	No
i.	Beneficiary Designation Correct	Yes	No
ii.	Recalculation Automatic	Yes	No
iii.	Payment to Trust Permitted	Yes	No
iv.	Terminates at Death	Yes	No
c.	Annuity Contracts Reviewed	Yes	No
i.	Annuity Ownership Correct	Yes	No
ii.	Annuitant / Beneficiary Correct	Yes	No
iii.	Can Non-Owner Spouse Continue Income Tax Deferral at Death of Owner Spouse	Yes	No

TRUST REVIEW CHECKLIST, CONTINUED
14.	Candidate for Advanced Estate Planning
a.	Intervivos QTIP Trust	Yes	No
b.	Annual Gifting ($10,000 per Non-Spouse Donee) ($100,000 Non-Citizen Spouse) (Unlimited Citizen Spouse)	Yes	No
c.	Children’s / Grandchildren’s Trust	Yes	No
d.	Business Buy / Sell Agreement	Yes	No
e.	Irrevocable Life Insurance Trust (ILIT) – Separate (1) (2) – Joint	Yes	No
f.	Combine ILIT with Split Dollar	Yes	No
g.	Qualified Personal Residence Trust (QPRT) Single – Split	Yes	No
h.	Split Purchase of Property	Yes	No
i.	Charitable Remainder Uni-Trust (CRUT) – Net Income Charitable Remainder Uni-Trust (NIMCRUT) – FLIP Uni-Trust (FLIPCRUT) Intervivos – Testamentary	Yes	No
j.	Family Limited Partnership (FLP) / Family Limited Liability Company (FLLC)	Yes	No
k.	Sale to Defective Grantor Trust (SIDGT)	Yes	No
l.	Grantor Retained Annuity Trust (GRAT) / Grantor Retained Uni-Trust (GRUT)	Yes	No
m.	Grantor Retained Income Trust (GRIT) (nephews / domestic partners)	Yes	No
n.	Self Canceled Installment Note (SCIN) (shortened life expectancy)	Yes	No
o.	Charitable Lead Annuity Trust (CLAT) (shortened life expectancy) Intervivos – Testamentary	Yes	No
p.	Private Foundation Intervivos – Testamentary	Yes	No

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William Hayes

As an attorney in private practice in Los Angeles County, California William Hayes provides extensive estate and tax planning services to individuals and businesses in Los Angeles, Pasadena, Glendale, Burbank and surrounding communities. Attorney Hayes’ primary focus is to help clients avoid probate, protect their assets, and provide for the security of their loved ones with a well-crafted estate plan. He believes in giving each client the time needed to explain his or her needs and wishes and then dedicates his efforts toward making the client’s desires clear in their final estate plan.

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General Review of Client Situation

Annual Exclusion Gifting

Structuring Fractional Interests

Charitable giving

Gifting for Decoupled States

Income Tax Basis Issues

Roth IRA

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