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Estate Planning Tips Before and After a Loved One’s Death, Pt. 1

Estate planning lawyers agree that there has been a fundamental shift in their clients’ estate planning concerns over the last couple of decades. There has been less worry about estate tax minimization and more concern for income tax minimizations and other valuable planning ideas. Thankfully, there are things that can be done with an estate before and after your loved one passes away that can add value to an estate for them as they age as well as for their heirs.

Tips for Aging Loved Ones

If you are going over your elderly’ loved one’s estate plan, there are some important items that you should review or look out for in their estate. These issues can include:

Watching for Lack of Capacity
Your loved ones can lose mental capacity as they age, and it is important for the purposes of estate planning that you monitor their ability to make rational decisions on their own. It is important to update estate planning documents while they can still articulate them and not be challenged later for a lack of capacity.

Exercising Swap Powers
Many irrevocable trusts include a right for the person who sets up the trust to exchange assets outside the trust for assets in the trust. If highly appreciated assets are transferred back into the trust before death, the tax basis is stepped up at the date of death.

Review Principal Trust Distributions
While most trusts pay out income to beneficiaries, some trusts also allow for the payment of the principal. There are pros and cons to this type of trust structure, and you should review it with your loved one and an attorney to decide if this is the best setup for you loved one’s assets.

Shift Timing of Charitable Gifts
Only estates that are taxable can benefit from an estate tax charitable contribution gift. If you review the estate of your loved one and know that they are below the estate tax exemption level, you should prepay charitable bequests while they are alive so that they can qualify for income tax deductions. However, you should also get it in writing from the charity that the donation is a prepayment of the bequest under the will so that it is not paid double at death.

Amend any Limited Partnerships
This applies if the limited partnership is also a family limited partnership. In the past, family limited partnerships were formed to provide tax valuation discounts. However, at current exemption levels, this type of partnership may not help so much as hurt. Because the discount could reduce the basis step-up on death and cause higher capital gains taxes when a sale is made in the future, it is important to review them now.

Trust Situs
The situs of the trust is the state where it is based and subsequently dictates the governing law. However, now more than twenty states permit “decanting” of trusts where one trust can be merged into another. As a result, it is becoming increasingly important to draft trusts with provisions permitting a change in situs and governing law.

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