If you are an estate planning attorney, it is inevitable that at some point you will receive a phone call from a client who recently has been diagnosed with a terminal illness or from a client’s family member informing you that your client has very little time to live. Given that time is of the essence in such a situation, are you prepared to respond quickly and efficiently? What questions do you need to ask? What issues do you need to consider? What prudent advice can you offer your client and his or her family? This article offers practical answers to these questions to help prepare you to respond to such a call.
Assess Client’s Competency
Often the first thing you will need to determine is whether your client is legally competent to create an estate plan, update an existing estate plan, or transfer assets, if applicable. To execute a will, an individual must know the natural objects of his or her bounty, what property he or she is disposing of, and to whom the disposition is being made. Generally, you should be able to ascertain whether your client is competent to sign a will by asking some fairly straightforward questions. In situations in which a client’s competency may later be called into question, it is wise to document the conversation in detail. At the signing of the client’s estate planning documents, you should be sure to carefully select disinterested witnesses, fully explain the provisions of the documents to the client in the presence of the witnesses, document the meeting for your file, and prepare affidavits for the witnesses to sign. Even if the documents being signed do not necessarily require witnesses, it would be prudent to consider having at least one witness present who can attest to the client’s competency. If there is an attending physician who is willing to certify that your client is competent, having something in writing from a medical person may prove useful after the client’s death if any of the documents, particularly the will, are challenged. A deathbed will is much more likely to be challenged, even if the client is competent, than a will executed when death was not imminent.
In cases in which your client is incompetent, there may be little you can do. In these situations, you should ascertain whether there is a durable power of attorney for finances and property in place and, if so, what actions the agent has been authorized to take. You may well be able to accomplish everything that needs to be done through a durable power of attorney. Of course, if there is currently or is likely to be family discord, agents acting under a power of attorney should proceed with caution and only act in a manner that is clearly consistent with the client’s wishes.
Review Estate Plan
If your client has an estate plan, he or she should locate the original documents, if possible, and you should review them to determine if any updates must be made to account for changes in the law since the plan was executed, and confirm with your client that the plan still properly reflects his or her wishes. If no estate plan exists, one should be drafted and signed as quickly as possible, assuming client competency.
After reviewing the estate plan, you should discuss the following matters with your client:
Are the named fiduciaries – that is, personal representatives, trustees, and guardians of minor children – the individuals (or institution) your client still wants to have?
Do the dispositive provisions of the will and any revocable trust still reflect what your client wants to have happen to his or her assets at death? In light of the American Taxpayer Relief Act of 2012, which raised the federal estate and gift tax exemptions to $5 million (indexed for inflation) and made portability permanent, does the overall structure of the estate plan still make sense?
Is a credit shelter trust still necessary, or would a more simplified “all to spouse” type of plan be more appropriate?
If the estate will not be subject to federal estate tax, has the plan been reviewed with an emphasis on ways in which income taxes can be minimized for beneficiaries of the estate?
With respect to the client’s ancillary documents, are the agents named in the financial and health care powers of attorney available and still willing to act?
Is there an adequate HIPAA release in place so that your client’s agent has access to medical records to make informed health care decisions? Any necessary revisions should be made promptly with the above-mentioned concerns about competency in mind.
Examine Beneficiary Designations
In addition to reviewing your client’s will, revocable trust, and other estate planning documents, you should also collect and review his or her beneficiary designations for assets such as retirement benefits and life insurance policies to ensure they are in sync with the rest of the estate plan. For example, if your client’s revocable trust leaves everything to his children, John, Mary, and Sue, but his life insurance beneficiary designation form names only John and Mary as the primary beneficiaries of the policy, it warrants confirming that your client intended to exclude Sue. If it is an old life insurance policy, it is possible that Sue was not yet born when the original beneficiary designation form was completed, and your client may be unaware that Sue is not included as a beneficiary.
com amalia.todryk quarles Amalia Levit Todryk, Marquette 2003, is a partner in the Trusts & Estates Group at Quarles & Brady LLP, Milwaukee.
com kathryn.muldoon quarles Kathryn A. Muldoon, Boston College 2006, is an associate in the firm’s Trusts & Estates Group.
Beneficiary designations should also be reviewed for probate and tax efficiency. If probate avoidance is a goal, the client’s estate should not be named as a beneficiary because doing so will likely trigger a probate. In general, a trust (unless it qualifies as a conduit trust) should not be named as a beneficiary of a qualified retirement plan so as not to cause unintended income tax consequences for the trust or its beneficiaries. If your client desires to make a charitable gift upon death, you might suggest that it be made directly from his or her qualified retirement plan. Any distributions from the plan will not be subject to personal income tax if paid directly to a charity, and individual beneficiaries of the estate would likely prefer to receive other assets that do not have a built-in income tax liability associated with them.
Take Steps to Avoid Probate
Taking steps to avoid probate before your client’s death can save the family a good deal of time, effort, and legal fees. Some assets, such as real estate, bank accounts, and brokerage accounts, can circumvent probate with a simple “transfer on death” (TOD) or “payable on death” (POD) designation. Attorneys should be aware, however, that under Wis. Stat. section 705.15(2) (all references to Wisconsin Statutes in this article are to the Wisconsin Statutes in effect as of Aug. 1, 2013), a TOD deed for real estate is not effective until recorded in the county where the property is located. If your client owns out-of-state real estate, you should look at the laws of that state to determine whether an ancillary probate can be avoided by a similar TOD deed, by re-titling the property in the name of your client’s revocable trust, or even by transferring the property to a limited liability company (which may have the added benefit of avoiding a state estate tax if one exists).
Although Wis. Stat. section 766.58(3)(f) allows a married person to transfer assets to an individual(s) or a trust or other entity without the need for probate via a marital property agreement (the so-called Washington will provision), it is often more practical and efficient to transfer property to your client’s revocable trust during his or her lifetime rather than relying on a Washington will provision, which can be difficult to implement after a client’s death. To transfer assets to your client’s revocable trust, the legal owner should be changed to “Mr. Smith, and his successors, as trustee of the Mr. Smith Revocable Trust, u/a/d __________, as amended.”
Such a transfer will not give rise to a gift tax and, although the assets will still be included in the estate for estate tax purposes, they will avoid a probate proceeding and a potential battle with a transfer agent who may not be familiar with the operation of Wis. Stat. section 766.58(3)(f). In the event your client is not competent, his or her durable power of attorney for finances and property may authorize an agent to make such probate avoidance transfers or enter into a marital property agreement with his or her spouse for purposes of effecting a non-probate disposition of property as described in Wis. Stat. section 766.58(3)(f).
In certain circumstances, adding one or more joint owners to an account can be a simple yet effective way to avoid probate. However, you should advise your client of the potential gift tax implications of adding an owner to an account, as well as the possibility that such a transfer may upset a well-balanced estate plan. For example, if your client adds her daughter, Sue, as a joint owner on her $1 million savings account, the account will avoid probate. However, your client arguably will have made a taxable gift to Sue and may need to file a gift tax return. Furthermore, if your client’s estate plan leaves everything equally to her three children, including Sue, then by virtue of the joint account, Sue will receive $1 million more than her siblings, which might not be the intended result.
Locate Vital Information
You should encourage your client to assemble the following information, which will facilitate estate administration after death: 1) names and contact information for all financial and legal advisors; 2) assets, debts, and obligations owned by or attributable to your client; 3) tangible personal property and intended beneficiaries, if known; and 4) private information, such as the username and password for all online accounts, security codes, location of safe deposit box and key, and instructions on how to gain access to a home safe.
You should also urge your client to locate and organize important paperwork, such as original estate planning documents, deeds, life insurance policies, annuity contracts, vehicle and boat titles, contracts, promissory notes, savings bonds, stock certificates, buy-sell agreements, recent statements for all financial accounts, prior year federal and state income tax returns, and prior gift tax returns. Additionally, you should encourage your client not only to discuss any outstanding issues with the individual who will be responsible for each of the above-mentioned documents following death but also to inform the appropriate person of the location of these documents.
If your client has a safe deposit box, ask whether the box can be emptied and closed before death. If not, you should determine if your client has authorized (or can authorize) another individual to access the box so that the contents can be secured and the box closed after death, thereby avoiding a probate or special administration that otherwise might not have been necessary.
With respect to digital assets, it is worth noting that federal legislation does not yet exist regarding disposition of digital property at death. Although some states have created laws designed to protect one’s digital assets and grant one’s family members the right to access and manage his or her online accounts at death, Wisconsin is not one of them. This means that family members of a Wisconsin decedent must follow each online company’s subscriber agreement to access a decedent’s account, which can be virtually impossible without a username and password. In today’s world, it is not uncommon for an individual to manage the bulk of his or her banking, investing, and bill paying online, leaving no paper trail for his or her family or personal representative to follow after his or her death. Therefore, as the attorney for the estate, it no longer is sufficient to advise the family or personal representative to simply monitor the decedent’s mail for several months to ensure that all the decedent’s assets have been accounted for and all bills have been paid. You should now recommend that your client not only keep a current list of all usernames and passwords for online accounts but also written instructions regarding his or her wishes with respect to the same. For instance, if your client stores photographs on a photo-sharing website, does the client want them to be shared with certain individuals at death or would your client prefer that the account be deleted?
Provide Instructions for Funeral and Burial
If your client has strong feelings about the disposition of his or her remains and funeral arrangements, or who should make such decisions, they should be put in writing. In the absence of any such writing, Wis. Stat. section 154.30(2)(a) dictates who has authority over such matters following death. Section 154.30(8)(f) of the Wisconsin Statutes provides a sample “Authorization for Final Disposition,” which can be used to designate the individual your client would like to have carry out his or her wishes. This is particularly useful in situations in which the client is in a committed relationship but not married or in which there is a second marriage and adult children from the first marriage do not have a harmonious relationship with the current spouse.
Discuss Making Lifetime Gifts
If your client is competent (or if a durable power of attorney for finances and property permits an agent to make gifts on the client’s behalf), you may want to discuss making nontaxable gifts while the client is still alive. If your client has a taxable estate and the means, encourage reducing the estate by making annual exclusion gifts to family members and other individuals. Also, paying tuition and medical expenses on behalf of family members and other individuals directly to the educational institution or medical facility would be exempt from gift tax under I.R.C. § 2503(e) (as in effect Aug. 1, 2013). Any such gifts should be made in cash, by wire transfer, or by cashier’s check to ensure the gift is completed before the client dies.
Bear in mind that appreciated assets should not be used to make such gifts because the donee will assume the client’s cost basis and will likely recognize a capital gain when the asset eventually is sold. By contrast, assets that pass as a result of death will receive an automatic step-up in their cost basis to fair market value as of the date of death; therefore, appreciated assets are best held in a client’s estate so the beneficiary can avoid recognizing a capital gain to the extent possible.
For example, if your client purchased his or her residence in 1975 for $50,000, and it is now worth $650,000, you should advise your client to consider transferring the residence to his or her revocable trust to avoid probate, but you should not advise your client to transfer the residence to his or her children during lifetime. This is because a lifetime transfer would result in the children acquiring the residence with a cost basis of only $50,000, thereby having to recognize a $600,000 capital gain if they decided to sell the residence shortly after the transfer when it was still worth $650,000. If instead your client retains the residence until death either in his or her individual name or in the name of his or her revocable trust (assuming the terms of the trust provide that the residence will pass to the children upon the client’s death) and the residence is worth $650,000 at the date of the client’s death, the children will acquire the residence with a new cost basis of $650,000, which will result in the children recognizing little to no capital gain if they decide to sell the residence shortly after your client’s death.
If your client’s estate plan contains charitable bequests, consider encouraging your client to make those gifts while alive to secure a deduction on the final income tax return, particularly if the estate will not be subject to estate tax and accordingly will receive no charitable estate tax deduction for those bequests. Of course, if your client opts to follow this strategy, be sure to remove the bequests from the estate plan or have the charity sign an acknowledgment stating that the gift was a full or partial advance on the bequest, so the charitable bequest is not paid twice.
Convert Traditional IRA to Roth IRA
By converting a traditional IRA to a Roth IRA, your client not only reduces his or her taxable estate by paying the income taxes due on the conversion but also provides a huge tax benefit to the Roth IRA beneficiary because distributions from the Roth IRA will be tax-free to the beneficiary. Depending on the size of the traditional IRA before the conversion and the beneficiary of the account, you will want to consider whether by benefitting one beneficiary of the client’s estate (that is, the beneficiary of the new Roth IRA account), you would be disadvantaging another beneficiary (that is, the residuary beneficiary of your client’s estate, whose share will decrease as a result of the payment of income taxes on the conversion).
Sell Depreciated Assets. If the client’s estate contains substantially depreciated assets such as real estate or securities, you should discuss whether it makes sense to sell them before death in order to recognize the loss on the final income tax return, thereby offsetting any gains for that year.
Pets. For many clients, the future care of their pets can be a concern. Arranging for a successor owner and, in some cases, allocating a specific sum of money to that individual for the care of a pet can bring peace of mind to the client and provide direction to his or her personal representative.
Although this article is by no means exhaustive, it covers some basic points that all estate planners should consider when faced with a client who is nearing death. Your client and his or her loved ones will be grateful to have a lawyer who can respond to an often time sensitive situation swiftly and decisively and provide sound advice in a time of crisis.