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Postmortem Estate Planning: Preparing for the Unpredictable

Good estate planning accounts for the “what-ifs.” The plans you and your estate planning attorney put in place now will function as planned if circumstances do not change. But if you die years from now, will your estate plan function just as well? What if your loved ones’ financial needs change between now and then? What if the way you planned to distribute your assets does not help them like you imagined it would? Postmortem estate planning may create flexibility to account for those “what-ifs.” 

Postmortem planning is a planning technique that may be used by your heirs to revise your plan to suit their current needs better. Postmortem estate planning is highly individualized and complex. There is no set checklist of tasks involved. Rather, it is something your heirs and the probate attorney should strategize together. Nevertheless, there are a few common concepts you should know.   

Common Postmortem Estate Planning Concepts

Disclaiming:  Inheriting assets from a loved one’s estate is not always financially beneficial for the heir. Disclaiming is a process that beneficiaries may use to essentially reject assets that have been directed to them through a trust or will (or through intestate succession if the decedent died without a will). Those assets then pass to the next beneficiary in line. For example, if your parent bequeaths to you an asset that you want to disclaim, it might pass to your sibling or your children, depending on your parent’s will or trust.

There are a variety of reasons why beneficiaries may elect to disclaim an inheritance. Often, an heir disclaims an asset because they do not need the money and don’t want the assets to increase their estate tax burden. By disclaiming your interest, the asset will not be part of your estate when you pass away. This disclaimer will allow the asset to bypass your estate and go directly to your children without the additional estate tax burden. 

Sometimes an heir might disclaim assets because they feel someone else needs them more. Say your parent dies and leaves you assets, but you have sufficient wealth and don’t need the additional assets. Your child, the next heir in line, is a young adult in their first job who is years away from being able to afford their first home. You might disclaim the assets so your child has the resources to acquire their own property to live in.

There are rigid timeframes for disclaiming. Wait too long, and you will not be able to disclaim the assets. If you do not want to accept inherited assets for any reason, you must file a disclaimer within nine months of the decedent’s death. Your estate planning attorney can help you file a disclaimer in accordance with your state laws. 

QTIP Elections:   Qualified Terminable Interest Property (QTIP) trust allows a spouse to leave assets to their surviving spouse while controlling the ultimate disposition of those assets. When spouse A dies, the surviving spouse (spouse B) can choose to make a QTIP election on the estate tax return. If spouse B makes the QTIP election, the assets in the QTIP trust are not taxed on spouse A’s death but are subject to estate taxes upon spouse B’s death. In Massachusetts, for example, the estate tax is a graduated rate ranging from .8% to 16%. If an estate is subject to federal estate tax, the tax rate is a flat 40%

In most cases, it makes sense for the surviving spouse to make the QTIP election to defer the Massachusetts estate tax until the death of the second spouse. But that is not always true. In some cases, it may make sense to take advantage of the graduated rates in Massachusetts and to not make a QTIP election on all of spouse A’s assets. 

The strategy of not making the QTIP Election can provide significant estate tax savings for the couple overall. By implementing this strategy, we are often able to save families with a Massachusetts combined estate of over $10 million, a significant amount of Massachusetts estate taxes. But like all estate planning strategies, the decision to make or not make a QTIP election needs to be reviewed in each individual case.

Alternate Valuation Date: The amount of estate tax due on a decedent’s death is determined using the value of assets on the date the decedent died or the alternate valuation date (6 months after death). This basis is also the amount used to determine subsequent gains or losses for income tax purposes. Oftentimes, if the value of the decedent’s assets has decreased since the decedent’s death, it makes sense to use the alternate valuation date for purposes of the estate tax. But, because of income tax implications, the determination of which date to use to value the assets should be made by your heirs together with their probate attorneys.

Power of Appointment:  This is another estate planning concept that involves postmortem planning. A power of appointment in a trust or will allows your heirs to redirect where your assets are bequeathed after you pass away. A power of appointment is often limited to leaving assets to your lineal heirs so that the power is not an unlimited ability to change who receives your assets. The power of appointment is usually drafted into your trusts to allow modifications of asset transfers after your death.

For example, spouse A passes away with a 50% interest in a vacation home in his trust. On the death of spouse B, the vacation home is supposed to pass to your two grandchildren. While spouse B is alive, one of the grandchildren purchases their own vacation home and does not want the vacation home from their grandparents. But because spouse A has already passed away, their trust cannot be modified, and their 50% share of the vacation home will pass to both grandchildren. If spouse A included a power of appointment in the trust, spouse B, while alive, can utilize the power of appointment in their will to assign the 50% interest in spouse A’s trust to the grandchild who wants the vacation home. 

There are many cases where it makes sense to use powers of appointment. Often, this is a tool used to create flexibility for the surviving spouse in case circumstances change. 

Sassoon Cymrot Law, LLC works with clients to create estate planning strategies that grow and evolve with them. Whether you’re navigating an inheritance or creating your own estate plans, reach out for help using postmortem estate planning strategies to minimize taxes and maximize assets. Contact us today.

Scott Wittlin is a business and tax attorney with significant experience in advising businesses and the business owner. Scott works with business owners in addressing the complicated tax decisions they face in both their succession and estate planning. He works with his clients to maximize their tax benefits in all facets of their business and personal lives. He also assists families with probate and estate administration.
Barry Weisman’s career as a tax lawyer began in 1969 in the National Office of Chief Counsel, Internal Revenue Service.

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