6 postmortem strategies for revitalizing an estate plan
Estate planning is an inexact science. No matter how much time and thought you put into a plan, changing tax laws and personal circumstances can hamper its ability to achieve your objectives. Fortunately, there are postmortem strategies your spouse, executors and beneficiaries can use to reduce estate taxes and accomplish your goals. Here are six of the most useful.
- Create a qualified disclaimer
A qualified disclaimer is an irrevocable refusal to accept an interest in property from a will or living trust. Under the right circumstances, a qualified disclaimer can be used to redirect property to other beneficiaries in a tax-efficient manner.
For example, your will leaves your entire estate to your daughter or, if she predeceases you, to your grandchildren. If at your death your daughter doesn’t need all of the money, she can file a qualified disclaimer with respect to a portion of it, which will then pass directly to your grandchildren. Assuming that the disclaimed property is protected by your generation-skipping transfer (GST) tax exemption, the disclaimer allows your family to avoid the estate or gift taxes that would have been owed had your daughter received the property first.
To qualify, a disclaimer must be in writing and delivered to the appropriate representative within nine months after the transfer is made (or, if the disclaimant is a minor, after turning 21) and before the disclaimant accepts the property or any of its benefits. Keep in mind that the disclaimant has no power to determine who will receive the property. Rather, it must pass to the transferor’s spouse or to someone other than the disclaimant, according to the terms of the underlying document making the transfer — such as a will or living or testamentary trust or beneficiary form.
- Make a spouse’s right of election
To discourage people from disinheriting their spouses, most states’ laws give surviving spouses a right of election that allows them to circumvent the will and take an elective share of certain property. The share varies from state to state: It may be a set portion of the property, such as one-third or one-half, or the percentage may increase with the length of the marriage.
Because a spouse’s elective share of property qualifies for the marital deduction, exercising the election can be an effective way to reduce estate taxes. Keep in mind, however, that this strategy can have a negative effect on any charitable remainder trusts (CRTs) established as part of the estate plan.
A few years ago, the IRS ruled that all CRTs created on or after June 28, 2005, would be disqualified unless the donor’s spouse waived his or her right of election. In 2006, the IRS suspended that ruling indefinitely, stating that it would disqualify CRTs only if the surviving spouse actually exercises the right.
Texas is a community property state. Even in Texas, a spouse can make a disposition in a Will that disposes of the other spouse’s share of a community asset. When this happens, the surviving spouse has the choice to take under the Will or to make an election against the Will “elective share” and take his or her community share. The surviving spouse needs to determine if it is more beneficial to take under the Will or take their share of the community property.
- Use (or forgo) a QTIP election
A qualified terminable interest property (QTIP) trust can be an effective way to use the marital deduction to minimize estate tax at the first spouse’s death and limit the surviving spouse’s access to the trust principal. For the transfer of property to the trust to qualify for the marital deduction, several requirements must be met. For example, the trust assets must be invested in income-producing property, and all of the trust income must be distributed to the surviving spouse at least annually. In addition, a QTIP election must be made on the estate tax return.
QTIP assets ultimately are subject to tax as part of the surviving spouse’s estate. In some cases, though, including more assets in the estate of the first spouse to die can minimize the overall estate tax. This might be the case if the first spouse has fewer assets than his or her available lifetime exemption. In such a situation, the deceased spouse’s personal representative may decide not to make the QTIP election or to make a partial QTIP election.
- Perform a special-use valuation
If a significant portion of the estate consists of real property used in a family business or farm, it may be possible to reduce estate taxes with a special-use valuation. The executor can elect to value the property based on its actual use, rather than its “highest and best use,” subject to certain limitations. Several strict requirements must be met to qualify for a special-use valuation. For example, “qualified heirs” must materially participate in the operation of the business or farm for at least 10 years after the decedent’s death.
- Defer payment of estate taxes
If the decedent’s interest in a qualifying closely held business exceeds 35% of his or her adjusted gross estate, the executor can elect to defer estate taxes attributable to that business for five years (paying interest for only the first four years) and then pay the tax in 10 annual installments. To qualify, the estate must, in general, meet several requirements, including furnishing a surety bond or consenting to a tax lien on the property.
- Use the alternate valuation date
Property typically is valued as of the date of death for estate tax purposes. But an executor may elect to use the alternate valuation date, which is six months later. This date can be used only when it results in a lower estate tax bill and, therefore, is typically elected when the value of property has declined.
But keep in mind that the election is irrevocable and can’t be applied selectively to certain property. Once the election is made, it applies to all of the estate’s property (except for property disposed of during the six-month period).
Build flexibility into your estate plan
As you plan your own estate, talk with your advisor about techniques you can use to provide your executor and beneficiaries with the flexibility they need to effectively implement these and other postmortem estate planning strategies.