The advice most commonly given to a person who is seriously ill is to “get your affairs in order.” This statement, however, may hold different meanings for different people. The first priority should be to ensure that the individual’s emotional and physical needs are satisfied. But there may also be time to focus on shifting property out of the ill person’s estate to reduce the estate tax bite. Even when time is limited, a number of techniques can reduce or minimize taxes and augment the amount left for the family.

Give Some Away Now

A quick and effective way to remove significant sums from the estate is to make current gifts to family members. The donor’s taxable estate will be reduced for each annual gift made -- up to $10,000 per recipient (the annual exclusion amount). If the ill person is married and his or her spouse consents to splitting gifts, the amount increases to $20,000.

Small bequests to family members or close friends are often included in an individual’s will. For example, a will may state “I give $10,000 to each of my grandchildren.” If an ill person’s estate plan includes these types of bequests, making these gifts before death can save estate taxes. The lifetime gifts will avoid estate tax (and possibly generation-skipping transfer tax) because they are below the annual exclusion amount, while gifts at death will cut into the $650,000 exclusion from estate tax or even incur estate tax if the exclusion is otherwise used up. In addition, the donor may receive greater satisfaction from seeing family members and friends enjoy the benefit of the gift.

Making some taxable gifts may also be beneficial if the ill person’s estate includes appreciating property. If the ill person transfers such property to his or her children, then future increases in the property’s value will not be included in the taxable estate. Making taxable gifts during life is less expensive because the funds used to pay the gift tax are also out of the ill person’s taxable estate if he or she lives for three more years. If the ill person is not expected to live past the three-year period, he or she should split the gift with his or her spouse, and the spouse should pay the gift tax. This may avoid inclusion of the gift tax in the ill person’s taxable estate.

Consider Life Expectancy

Life expectancy often plays a role in the use of gifts for estate planning. Gifts of annuities, life interests, term interests, remainders and reversions are valued using standard actuarial tables. If a person makes a gift while retaining a term interest in the property and dies earlier than predicted by the standard actuarial tables, then the value of the gift of the remainder interest will have been understated, resulting in a gift tax savings.

But the actuarial tables cannot be used if the individual making the transfer is seriously ill at the time the transfer is made. A person is considered seriously ill for gift and estate tax purposes if he or she has an incurable illness or other deteriorating physical condition, with at least a 50% probability that he or she will die within one year.

Document evidence of health by having a physician examine the donor at the time of the gift and provide a written opinion regarding the probability of the donor surviving beyond one year. If the person survives for 18 months after making a gift with a retained interest, he or she is presumed not to have been seriously ill at the time of the transfer, though the IRS may rebut this presumption.

Assistance Is Available

The emotional and physical decisions that a seriously ill person may face can be overwhelming. While arranging for the orderly disposition of the ill person’s property may seem to be an added burden, it should not be ignored. If we can be of assistance with answers to your questions or concerns, please give us a call.

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