Terms like “estate planning” and “wealth transfer” provide little shelter from a painful reality—a large portion of what we do as advisors focuses on the issues associated with our clients’ mortality.

We have worked with clients on these issues for more than 25 years. You might think that after all that time, it gets easier to receive a call from a client with news of a grave medical condition. It has not—it is a gut punch every time. Our relationships with our clients are generally quite close, and calls from clients we have known for years can have an impact as if they were coming from a member of our own family.

It is a privilege to be placed in a position of trust at a moment when a client is facing many difficult decisions. We know that we are not the only people outside a client’s family who help shoulder such heavy news. But we are honored to be on a short list of people— doctors, spiritual advisors and lawyers—who can provide tangible assistance in these situations.

We are honored to be on a short list of people who can provide tangible assistance during challenging times.

Earlier this year, we received one of these calls from a client. After we discussed her diagnosis and her health care options, she asked that we move forward with whatever plans would be most beneficial to her family given her short time remaining.

By sharing some of the steps we take in these situations, we hope to highlight that when one’s circumstances change drastically, thoughtful action can often bring meaningful benefits. Here is what can be done in such situations:

Lifetime Gifts

When someone’s life expectancy is suddenly shortened, their financial objectives usually change. They no longer need a plan that supports their lifestyle and long-term health care expenses. In these situations, giving away assets to loved ones or charities may become more practical and advantageous.

For various reasons, making lifetime gifts may be more efficient from an estate and gift tax standpoint than transferring assets through a last will and testament. When clients have sufficient assets to warrant estate tax planning, we often recommend transferring a considerable amount of their estate to trusts that benefit family members. This may generate an immediate federal gift tax liability. But it may also reduce the eventual estate taxes levied by a state by hundreds of thousands of dollars, or as much as 9% of an estate’s total value. The savings often exceed the immediate federal gift tax.

Income Tax and Basis Considerations

We also want to ensure that clients think about minimizing their income taxes, which sometimes competes with estate and gift tax techniques. In these kinds of situations, we always look for ways to optimize the two considerations.

Some readers may be familiar with the “step up” in cost basis that occurs upon the death of an asset’s owner. If someone purchased an asset at $100 and it is currently worth $200, there is an embedded tax liability in that asset—you would pay taxes on the $100 gain were you to sell that asset. But when an asset owner dies, the cost basis of assets held at death is stepped up (or down) to fair market value, eliminating any embedded income tax consequences.

To take full advantage of this rule, we seek to have clients retain the highest concentration of appreciated assets possible within their estates. When it comes to transferring assets as gifts, we select securities with a high basis relative to their market value. When the transfer of assets with a loss is contemplated, we often recommend selling such assets to recognize the loss followed by a gift of the proceeds. Additionally, many sophisticated trust plans allow the creator to exchange assets with the trust. When possible, it is advantageous to swap assets into an existing trust with minimal embedded tax liability, in exchange for highly appreciated assets or property held by the trust. Each of these strategies aims to eliminate considerable capital gains taxes on the appreciated assets.

Further, we often advise clients to borrow cash to make gifts and to retain highly appreciated assets. Doing so can minimize estate taxes while also eliminating the built-in income tax liability of the retained assets.

Roth IRA Conversion

If clients have sizable regular IRA accounts, we may recommend converting to a Roth IRA. The amount converted is subject to income tax at ordinary rates, but this income-tax liability reduces the size of a taxable estate. Beneficiaries—often children or grandchildren— will be required to take distributions, but by converting to the Roth, the distributions are not likely to be taxable. This step helps reduce estate tax liability, provides beneficiaries with assets that will continue to grow tax-free and avoids the creation of a new tax liability for those beneficiaries.

Charitable trusts and Donor-Advised Funds

Creating trusts that benefit family members as well as valued charities can help provide for a family’s long-term well-being while mitigating taxes and encouraging charitable pursuits. In the March edition of The Advisory, we wrote about charitable lead trusts, which provide income to a charity during one’s lifetime and eventually pass the assets of the trust to designated heirs. Another option is a charitable remainder trust, which essentially does the opposite—it provides income to one’s family while the trust’s assets eventually pass to a charity in an income tax-deductible manner. Beneficiaries of these trusts can be donor-advised funds. This vehicle provides designated family members greater flexibility and control over the future disposition of the funds to various organizations.

When people are handling the most difficult kind of news, they are understandably reluctant to spend their remaining time discussing complex estate and tax planning. Nonetheless, taking some of the steps described above can make a real difference— a great deal can be accomplished when one no longer needs the financial cushion required for an indefinite retirement.

Ultimately, the most meaningful lesson we take from this recent experience is the value of building relationships over time. Because we have known each other for years, the client trusted that her needs were understood, and that we could adapt to her circumstances and plan in a relatively short period. Although the depth of our relationships make certain phone calls painful to receive, that depth also gives us the ability to step in and help when it may count the most.



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