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Estate Planning for Smaller Estates


             With the estate tax exclusion for 2012 of $5,120,000, many taxpayers with smaller estates ask why they need estate planning at all.  In fact, there are a number of reasons to make sure your estate plan is in good order: 

  1. It is extremely likely this high exclusion will not remain after 2012.  (It may even go as low as $1,000,000!)
  2. A good estate plan accounts for any number of contingencies in your personal and financial situations.
  3. Estate planning eases the probate process at death and assures your assets go where and how you wish upon your death.
  4. A proper estate plan puts control of your assets with the proper responsible person.
  5. Certain strategies may be implemented to save income taxes.
  6. You can protect your assets from creditors.
  7. You may preserve your assets within your family and protect them from divorce. 
  8. A business succession plan may be enacted to assist with the governance of the business and the business’ assets upon your death.
  9. Estate planning can help you plan for retirement.
  10. If you are charitably inclined, there are numerous ways in which estate planning can assist you in achieving those goals.                           

The exclusion referenced above means no estate tax is due on the first $5,120,000 of one’s estate in 2012.  The IRS currently allows the surviving spouse to carryover any unused portion of the deceased spouse’s exemption at his or her death.  This concept is known as portability, and it can be a very useful tool when used properly.  For estates under $1 million, disclaimer wills should be viewed as a good alternative to portability, but where there are creditor concerns, the situation should be viewed to see if Medicaid planning was appropriate.  For estates between $1 million and $5 million, that is between $2 million and $10 million for married couples, several categories of issues warrant attention, including preserving the generation skipping exemption, asset protection, outright versus credit shelter trust planning, state inheritance or estate taxes and freezing the estate. 

 Several general observations are worth noting.  It always seems to be a good idea to get life insurance out of estates now.  It may also be prudent to prepay premiums.  Also, Roth conversions should be considered pre-mortem as a technique to get taxes out of the taxable estate, in a situation that would otherwise involve income in respect of decedent (IRD). 

 In order to illustrate estate planning tactics, take this Example Problem 1.  Our answers to their situation appear below.

 A married couple has $2 million worth of assets.  They are in their mid-70’s, and were at one time considered wealthy, but they suffered from the effects of Madoff and now find themselves with a modest net worth consisting of their brokerage account of $1.5 million and their home worth about one-half million (in tenancy by the entirety).  They reside in New York, have 2 children and 4 grandchildren.  They have old wills which provide that all the assets of the first to die go to the surviving spouse (simple or sweetheart wills).  Fifteen years ago, they established a QPRT for their vacation home, which is now worth $1 million with a cost basis of $100,000.  The QPRT’s initial term has expired and the home continues to remain in the grantor trust.  Your clients can no longer afford to pay the rent.  The husband has been diagnosed with Alzheimer’s disease and the wife is concerned about their finances should the husband need a nursing home. 

 So, what would be the proper advice for an estate plan?

 They should redo the wills with credit shelter trust and marital trust planning.  They should not rely on portability.  It is unfavorable to rely on portability and unfavorable to rely on disclaimer wills.  Both leave assets exposed to creditors in most jurisdictions.  Further, usually one cannot disclaim under state law if you are insolvent. 

 For the vacation home, it is still in a grantor trust, so under Rev. Ruling 85-13, it is still considered owned by the grantor for federal income tax purposes.  The children could forego the rent, and arguably Sec. 2036 could cause inclusion in the taxpayers’ estate and a basis step-up, but the string does not exist at the time of the transfer to the QPRT, so this is not clear.  Prior to 1996, the taxpayers could buy back the house in order to get the low basis asset in their estate for step-up basis purposes.  Such a technique was prohibited prospectively by the IRS in 1996. 

 The vacation home is not exempt for Medicaid purposes; therefore, there is further planning that needs to be done.  What can be done to protect their assets if the husband has to go into a nursing home? 

 The investments should be moved to the wife.  Her Will can create a testamentary special needs trust if she happens to predecease her husband.  Both clients need current advance health care directives.  The clients need long term care insurance.  This may not be possible but the kids should be considering this.  The sweet spot to acquire long term care insurance seems to be when a couple is in their 50’s. 

 The couple should consider a lifetime QTIP.  This would combine state inheritance or estate tax planning with Medicaid planning by making specific provisions for the wife which do not interfere with Medicaid benefits nor allow for Medicaid inclusion.   A Medicaid IIOT (irrevocable income only trust) could be established to start the 5 year look back rule.  A closer examination of the client’s needs and assets is warranted to determine which or both of the trusts should be used. 

 In Florida, the inter-vivos QTIP is not as popular for personal residences since the home is already protected from creditor claims, etc. because of tenancy by the entirety.  This is not the case in New York and other states, so these issues should be looked at carefully.  Once the husband is moved to a nursing home, more planning can be done for the wife. 

 In some states, you could put all the assets in the wife’s name and the wife can refuse to care for the husband.  In other states, the state may have a cause of action against the wife for a duty of care to a spouse. 

Example Problem 2:   

 A husband and a wife have 2 sons, one who recently developed a new software product for which he anticipates significant revenues, the other son appears to be in a rocky marriage.  They have 3 grandchildren, one of which has special needs.  They live in a $3 million home in Naples, Florida, have a $2 million summer home in Nantucket, and have $3 million in liquid assets, including a $1 million IRA. 

 What estate freeze technique should they consider?  We would advise a defective grantor trust (DGT) and a qualified personal residence trust (QPRT).  The DGT can have discretionary tax reimbursement language that does not expose the DGT assets to creditors.  See PLR 2004-64 and PLR 200900402.  The QPRT offers the opportunity to remove a personal residence from one’s taxable estate, at an extreme discounted valuation, depending on the anticipated term of the trust.  There is however, a mortality risk that the grantor could die during the term of the QPRT, causing estate inclusion and loss of the tax benefits.  Another technique call the Remainder Purchase Marital Trust should be considered, which could effectively eliminate any mortality risk.

 How can they utilize their estate exemptions?  (1) they may need the assets so consider a self-settled trust in Nevada or Alaska; (2) consider non-reciprocal trusts; and (3) super credit shelter trusts for the wife and a QTIP for the husband.  

 What about the son’s software product?   Consider an Inheritors Trust or Beneficiary Defective Grantor Trust funded by the husband with $5,000.  Lapsing of $5,000 Crummey withdrawal power makes the trust a grantor trust vis-à-vis the beneficiary trust could be set up in an asset protection and tax haven state, such as Nevada.  Alternatives would be a self-settled trust, an inter-vivos QTIP, or life-time trusts for the son’s descendants.  When creating a self-settled trust or Inheritors Trust, consider giving a third party the power to add beneficiaries, so a surviving spouse can be added upon the grantor’s or beneficiary’s death.  Additionally, they need to consider how to protect the intellectual property related to the software, and the son may want to consider a limited liability company. 

 What other asset protection strategies are recommended?  Self-settled trusts, inter-vivos QTIP’s and life-time trusts for descendants may also be considered.  The family could place the Nantucket home in a trust – either a QPRT or a RPMT discussed above – to remove the home from probate. 

 Any other concerns?  Consider a third party special needs trust for the grandchild.  Be careful about giving Crummey powers to a special needs child.  There are plenty of other concerns that this family would want to address in order to fully protect their assets and pay the least amount of estate taxes. 


Certainly, the above situations are just examples of possible estate planning techniques that we employ everyday depending on the particular situation of the client.  Every client, no matter how large or small their estate, needs estate planning. 

*IRS regulations require that we inform you as follows:  Any U.S. federal tax advice contained in this communication is not intended to be used and cannot be used for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or tax-related matters.


  • Mike Hoffman

    Mike is the founding and managing partner of Hoffman & Associates and oversees the general operations and personnel of the firm. He works primarily in the estate planning practice helping clients minimize the effect of the estate tax, ensure orderly transition of generations in family businesses, and maximize asset protections. Mike also devotes a considerable amount of his efforts to the business law and tax planning needs of the firm’s clients. He is licensed to practice in the States of Georgia, Ohio, and Tennessee, and is a Certified Public Accountant.

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