Estate Planning 101
Estate and Gift Taxes
Terminally Ill
Terminally Ill

Estate Planning for the Terminally Ill

A wealthy, unmarried individual has procrastinated in doing estate planning, but learns that he has not long to live. He is competent and lucid. What should be done?

The following is a checklist of items that should be considered:

bulletDurable Powers of Attorney. Depending upon the client's present condition, these may be immediately effective or "springing." There are three types of powers of attorney - financial management, personal care, and health care.
bulletRevocable Trust. Probate avoidance is the objective here. The attorney-in-fact may be authorized to assist in the creation and funding of this, if necessary.
bulletGifting Programs. Gifting of property with a high income tax basis should be considered, especially when coupled with discounting techniques such as -
bulletFamily Limited Partnerships and Family LLCs
bulletGifts of undivided interests in property.
bulletIf the individual is expected to live more than one year, a private annuity arrangement whereby the individual transfers property to his intended beneficiaries for their unsecured promise to pay him an annuity for life. (If there is less than 50% probability for the individual to live more than one year, you cannot use government actuarial tables for determining the value of the gift. It is best to get a doctor's opinion on this.) Property with a low income-tax basis may be used; however, there will be gain reported over the individual's life expectancy.
bulletSimilar to the private annuity is the sale of property in consideration for a self-canceling installment note (a "scin"). The rules for these are a bit less clear than for the private annuity.
bulletAnnual Exclusion Gifts. Of course, make as many $11,000 annual exclusion gifts as possible.  For minors, consider irrevocable trusts or Uniform Transfers to Minors Act custodianships.
bulletCommunity Property. If the wealthy individual had been married, a gift may be made by the healthy spouse to the dying spouse, resulting in a "step up in basis" for the property gifted. The same is true with all community property. Anyone interested in a prenuptial agreement?
bulletPaying gift tax. This is something we are not recommending for most persons, due to the likelihood of significant changes in the estate and gift tax laws. And paying gift taxes has never worked for someone who dies within three years.  Historically, there was an advantage to paying gift taxes (rather than holding property and paying estate tax).  Now, with the calendared repeal of the estate tax (but not the gift tax) in 2010, the scheduled reduction in estate and gift tax rates and the increase in the applicable exclusion amount (for estate and generation skipping tax, but not gift tax), and the need to live at least three years for the payment of gift tax to be an effective planning technique, it is very unlikely that you will want to pay gift taxes.

Most gifts may be made as "death bed gifts." The old 3-year gifts in contemplation of death rules have been repealed (with a few exceptions, the most notable of which are gifts of life insurance and payment of gift tax). Unfortunately, the gift taxes paid with respect to gifts made within three years of death are included in the decedent's gross estate for estate tax purposes, completely eliminating the advantage of payment of gift tax (rather than estate tax).

bulletGeneration skipping transfers. The wealthy individual should consider taking advantage of his generation skipping transfer tax exemption ($1,100,000) for gifts to grandchildren or to unrelated persons who are more than 37 years younger. If this is particularly important, a "dynasty trust" may be created to stretch the benefits over time (perhaps using a jurisdiction such as South Dakota which has abolished the rule against perpetuities and which has no state income tax).
bulletCharitable planning. There are a broad array of planning opportunities available when the wealthy individual is a philanthropist.


Outright gifts and bequests to charity are always welcome and tax deductible. (Do it now for an income tax deduction.)


A private foundation may be established now or upon death; the wealthy individual can exercise as much or as little control over this as he desires. (Community foundations may also be used for this.)


Funding specific charitable endeavors at a favorite charity.


Charitable lead trusts may be created. These come in several varieties, including grantor and non-grantor, annuity and unitrust.  When combined with a significant gift to non-charitable remainder beneficiaries, this can result in a tremendous tax savings and a lasting tribute to a favorite non-profit organization. (You can even combine this with a private foundation as the initial income beneficiary.)