Firm Publications

Planning for the Terminally Ill

By Rebecca G. Doane, Esq., published in Vive Magazine, April/May 2008

Death is an uncomfortable topic which many of us would prefer to ignore, but a family confronted with a terminal illness will be forced to face the reality of the situation. The dying person and each family member will need to begin to deal with the emotional aspects of death, and to try to make the best of the remaining time. As a result, practical matters, such as estate planning, may be the last thing that the family wishes to address. However, in the case of a terminal illness, numerous planning opportunities are available which can provide huge savings in estate taxes, administration expense and peace of mind for the survivors. Therefore, a person diagnosed with a serious illness should consider having their estate plan reviewed as soon as they feel comfortable doing so.

In reviewing the estate plan of a terminally ill client it is important to start with a basic overview. All important documentation should be located and reviewed. Existing wills, trusts, beneficiary designations for retirement plans and insurance, powers of attorney, living wills and other documents should be analyzed to assure they are up to date and still reflect your current wishes and will still serve to save taxes and reduce or eliminate administrative headaches. It would be important to assure that the existing estate plan is appropriate and sufficient (and not overly complex) based on current asset holdings. If you have a revocable trust you should assure that all assets have been transferred to the trust in order to avoid probate proceedings. If no revocable trust is in place, you should consider establishing one. That will greatly simplify the administration of your assets by your chosen trustee should you become incapacitated. It will also serve to avoid probate proceedings in the event of your death.

For many estates, the estate tax is a major concern. In some cases nearly half of the estate can be lost to the estate tax without proper planning. Fortunately, there are several estate planning opportunities designed specifically for the terminally ill patient. In some cases, use of these special planning techniques can reduce the estate tax bill by millions of dollars and may even eliminate the estate tax liability all together.

There are three related techniques which have been approved by the courts and the IRS and which can result in dramatic estate tax savings. All three of these techniques exploit the difference between a person’s actual life expectancy and average life expectancy as set forth in IRS actuarial tables. The most commonly used technique is the private annuity where the parent transfers substantial assets to a trust for children or grandchildren in exchange for a lifetime annuity. If the parent does not live to his or her life expectancy, most or all of the assets will escape estate taxation. This is a very powerful technique in the right situation.

A less dramatic, but sometimes important procedure is to assure that the ill person’s annual exclusions are fully utilized. Each of us can gift $12,000 annually to any number of donees. If I have three children, six grandchildren and three daughter or son-in-laws, I could gift a total of $144,000 free of gift tax. If my spouse consented, I could gift $288,000 free of tax. If I survived until January of the following year I could gift another $288,000. If a family partnership or other “leveraging” technique is used it might be possible to double those amounts so that a total of nearly $1.2 million could be transferred free of gift or estate tax.

Other concerns relating to the estate of a terminally ill patient would be to assure that assets are properly titled in his or her name or in his or her revocable trust so that the entire $2 million lifetime exemption from estate tax will be saved. That may require transferring assets from the healthy spouse to the ill spouse. Another planning opportunity is to assure that highly appreciated assets are held by the ill spouse. Upon death, those assets will generally receive a “step up” in basis so that capital gain will be eliminated when the asset is sold by the heirs after death.

The foregoing is just a sampling of some of the important concerns and planning opportunities when a person is diagnosed with a terminal illness. Facing the reality of that situation is one of the most difficult experiences a family will ever confront. However, if estate planning is addressed at the right time and with the right perspective, the resulting knowledge that one’s affairs are fully in order often affords the ill person and the family a great sense of solace and peace of mind.