Lifetime Planning Considerations
Too often, much of the estate planning process takes place after the individual has died. This is unfortunate since complex issues must be dealt with during a period of extreme grief and stress. Thus, it would be beneficial for an individual, particularly as the head of a household, to prepare other family members for such a contingency by taking a few simple steps while still alive.
Each individual's affairs should be organized. Assets should be inventoried and the locations of important documents should be itemized. Forms and worksheets for this purpose are readily available in most bank trust departments. The spouse, attorney and executor should each have a copy of these items.
It would also greatly ease the burden of the friends and relatives of a deceased individual if the individual made funeral arrangements or prepared a list of instructions relative to the desired means of interment. This would include such items as contributions to charity in lieu of flowers, the donation of body parts, or whether cremation is preferred.
Death is not always sudden and unexpected. It is always beneficial to begin to take advantage of estate planning opportunities when it has been determined that an individual's death is imminent. At that time, it should be ascertained that the individual's affairs are in order and any details should be finalized either by the individual directly or by the spouse through the use of a durable power of attorney, when necessary. For example, probate expenses can be reduced by retitling assets in the name of the trustee of a revocable living trust. Transferring assets into such a Trust does not remove the assets from the estate, nor does it affect the treatment of the assets for determination of the tax basis at death. However, assets held in Trust are not subject to the probate process, thereby reducing the reporting requirements and all related expenses.
Gifts made within the limits of the annual exclusion ($11,000 per donee) are not brought back into the estate regardless of how close the individual is to death when they are made (with the exception of life insurance). Therefore, in larger estates, gifts to children and other heirs should be considered in order to remove the assets from the estate and reduce the eventual estate tax. In selecting assets for this purpose, it would be best to choose assets that have not appreciated substantially, because there is a step up in basis to the date of death value (or the alternate valuation date, six months after the date of death) for most assets in the estate. Thus, it is more advantageous for appreciated securities, such as common stocks, to be distributed through the estate and receive the step up in basis; and it is less advantageous to use them for gift purposes, since in this instance the lower basis carries over to the recipient, who will then incur a substantial tax upon the sale of the appreciated securities. Instead, it would be more appropriate to use cash or fixed income assets as gifts.
It may be advantageous for an individual whose death is imminent to retitle appreciated assets from joint tenancy to the Trustee of a Revocable Living Trust. This advantage occurs because, just as property held in the descendent's name alone will receive a full step up in basis, so, too, will property held in a Revocable Living Trust. However, the basis on only one half of assets held in joint tenancy is stepped up since only one half of joint tenancy assets are included in the estate. Therefore, the transfer of appreciated assets to a Trust results in an increase in the basis of entire assets rather than in only one half assets, and the assets are still not included in probate. It should be noted, though, that the disposition of the assets held in Trust is controlled by the Trust document, whereas joint tenancy property passes by operation of law directly to the surviving joint tenant. Therefore, care should be taken so that the dispositive objective is continued to be achieved. It is not necessary to attempt this strategy with community property. Even though only one half of the property is included in the estate of the descendent, the basis of the entire assets is increased. However, the avoidance of probate can still justify transferring community property to a Trust unless the asset is held in joint tenancy, in which case the asset would not be included in probate in any event.