Stroll Lloyd Harbor - October 2023

Did you know that actions can be taken after you die (i.e., post-mortem) to achieve the best results possible for your testamentary plan? Some estate plans are intentionally structured to give your beneficiaries and your executor/trustee the ability to make educated post-mortem planning decisions after your death.

For instance, bequests can be altered through post-mortem estate planning to change ownership of assets and/or to obtain optimal tax results. Post-mortem planning permits decision making in light of the circumstances existing at your death (e.g., tax rates, exemption amounts, surviving beneficiaries).

A “disclaimer” is when a beneficiary wants the bequest made to him/her to go to the person who would have received the bequest if that beneficiary had died before you. For example, your will bequeaths $250,000 to your daughter, or if she doesn’t survive you, to her children. Daughter has an estate of $25 million and does not want the $250,000 becoming subject to estate tax in her estate. Daughter signs disclaimer documents and the $250,000 passes to daughter’s children. There are state and federal tax laws and time limitations with which to comply for this technique to be valid.

Tax elections made by your executor can have significant consequences. One of the many elections an executor can make is the election to use “alternate valuation” on an estate tax return. While the estate tax is usually applied to the value of assets at your death, an election is available to use the “alternate valuation date,” which is generally six months after your death. For instance, you die with a stock portfolio of $7 million, which declines in value to $5 million six months after your death. If the alternate valuation is elected, the estate tax will be levied on $5 million rather than on $7 million. Note that, however, the lower value becomes the income tax basis for your beneficiaries, which may result in larger capital gains taxes when the securities are sold. The income tax and estate tax costs and benefits must be carefully considered. There are numerous additional elections for your executor to consider.

For trusts created under your will or revocable trust, your executor/trustee chooses the assets to fund the respective underlying trusts. This choice can result in significant tax benefits. For example, your executor may put assets that are expected to appreciate quickly (e.g., a closely held business) into the credit shelter trust (that will not be included in your surviving spouse’s estate at his or her death) and put assets with little expectation of appreciation (e.g., bonds) into the marital trust (which will be included in your spouse’s estate). By thoughtfully choosing the assets to fund the trusts, the tax burden on your spouse’s estate can be significantly reduced.

In any case, it is important to consider the post-mortem alternatives that may be available to benefit your family.

This article appeared in the October 2023 issue of Stroll Lloyd Harbor.