As death looms, people become much more focused on arranging their affairs. Even those with few assets will develop a laser-like focus on leaving a suitable legacy. There are pitfalls to death-bed estate plans or revisions to existing plans. In a perfect world, an estate plan is constructed carefully after much thought and revisions are made regularly. However, lawyers and financial advisors are often solicited to make changes when a client fears an imminent demise.
Recently, I helped clients update their revocable living trust after the wife was diagnosed with terminal cancer. They created their trust 20 years ago and had not made any updates since that time. In the intervening years, one of their five children had passed away and numerous grandchildren had been born. The prior version of their trust provided that if one of their children predeceased them, the surviving children would receive the estate equally. The clients instead wanted the trust share that would have passed to the deceased child to be held in trust for the deceased child’s children or the clients’ grandchildren. If nothing had been done, the clients would have disinherited their grandchildren.
When making near-death amendments or creating new estate plans, advisors and clients must consider the income tax ramifications. A common mistake is to transfer a home or real property to children or grandchildren prior to death. Such a transfer results in loss of the step-up in basis of the property to the date-of-death fair market value. The child or grandchild receiving the property steps into the shoes of the transferring parent or grandparent and takes the transferor’s basis in the property. Usually, the basis is much lower than the present day fair market value. When the child or grandchild sells the property, he or she will incur a much higher capital gains tax than necessary.
Finally, to avoid a contest, a medical or mental competency examination can assure that the client is competent to make the change. These exams can be administered by the client’s regular physician. By using their normal physician, the client will feel more at ease and the physician will already have a history with the client and be able to differentiate whether the client lacks capacity.
Death-bed planning can be done effectively but there are numerous considerations and precautions to follow.