Americans are both living longer and dying in higher numbers than ever before. By 2020, more than 56 million individuals in the U.S. will be over the age of 65, compared with about 35 million in 2000. Meanwhile, there will be approximately 2.8 million deaths in 2020, up from just 1.7 million in 1960. By 2050, the projected number of Americans living over age 65 is set to surpass 86 million, with a projected 4.2 million deaths per year.1 Striving for old age is not always a good thing, as many individuals move into a protracted incapacity. As medical and technological advances are made, terminal illnesses can be managed for longer periods of time to defer the inevitable. For example, the number of Americans living with Alzheimer’s and other types of dementia is expected to increase by 300% to 13.8 million by 2050.2
Despite these sobering numbers, most individuals in the U.S. do not have a last will and testament, nor have they planned for their potential incapacity. Unfortunately, too many wait until it is too late – not only unnecessarily forgoing many of the tax and creditor protection benefits of sophisticated planning, but also leaving their families the difficult, time-consuming burden of administering an estate without any direction. Consider, for example, someone who dies without a will and without having discussed a plan for her death with family. After a potentially lengthy probate process (that could have been avoided with advance planning), where a judge no one has met determines who will be appointed as executor of the decedent’s estate, the assets of the decedent must be collected and reported. This is only one of many jobs with which an executor is tasked, yet imagine the difficulty in simply finding all the assets. Did the decedent have a safety deposit box that someone knew about? Did she have any outstanding loans payable by or to her? Did she have an online brokerage account where she had opted out of paper statements? Were her email address and password readily accessible to determine whether she had such online accounts or other financial obligations? The list of potential difficulties that may arise in simply finding the decedent’s assets is dauntingly endless.
Perhaps many who die without a plan pass away unexpectedly or too soon. However, the statistics mentioned earlier make clear that an increasing number of individuals will at least have some warning, whether it be a significant advanced age or a terminal illness diagnosis, creating an opportunity to plan for a more imminent death. Indeed, many calls Brown Brothers Harriman (BBH) receives regarding estate planning begin with some unfortunate and terrible news, followed by a sober “What now?” While this article is directed at those who have received a terminal illness diagnosis or are of an advanced age and who have done little planning and must immediately, its suggestions can apply to anyone, young or old, healthy or ill.
The Basic Necessities
The starting point for creating a plan for the terminally ill or those of an advanced age is to put into place some basic estate planning documents. These include the following:
- Last Will and Testament: This document disposes of an individual’s assets; names an executor to manage one’s estate, including the filing of a final income tax return and estate tax return; and, importantly for those with young children, names guardians of minor children. To avoid probate, unnecessary cost, administrative burdens and publicity, one should consider using a revocable trust to dispose of assets instead.
- Power of Attorney: This document names an agent or agents who can act on an individual’s behalf when making certain delineated financial decisions. Some states allow the agent to act at any time, while others allow the agent to act only when the maker becomes incapacitated. Generally, an agent’s powers should be broad and potentially include the power to conduct additional estate planning in the event of the maker’s incapacity.
- Healthcare Proxy and Living Will: This set of documents outlines an individual’s medical wishes in various states of medical incapacity and names an agent to make healthcare decisions on one’s behalf.
- Beneficiary Designation Forms: These documents name the beneficiaries for certain non-probate assets, such as insurance proceeds and retirement accounts.
Individuals who have any of these documents already in place should consider reviewing them if diagnosed with a terminal illness or as they reach an advanced age to ensure they still align with their wishes. All too often, many documents were put in place some time ago and no longer make sense; for example, it is common that an ex-spouse or deceased sibling is named in a document or beneficiary designation form. As part of this review, one should also consider creating a list of assets, including financial accounts, where each account is held and a contact person at each institution. At BBH, we often compile this list into one organized book with our clients’ help. Finally, individuals should consider their wishes for funeral arrangements and, if their state allows, execute a Disposition of Remains document that lists their wishes and names an agent to carry them out. Simply getting these basic documents in place will ensure that one is well ahead of the curve.
Tax Planning for the Terminally Ill
A couple Internal Revenue Code (IRC) provisions severely circumscribe one’s ability to make gifts just before death. These so-called death-bed transfer provisions were designed to prevent someone from waiting until the last minute to begin tax planning. One of these rules pulls any gifts made by a donor within three years of death back into his or her estate, effectively eliminating any gift or estate tax advantages of such a gift. In other words, one must survive a gift by three years in order to receive the tax benefits of doing so. However, annual exclusion gifts are a notable exception to this rule. A dying individual may make gifts up to the annual exclusion amount ($15,000 in 2018 and 2019) to as many individuals as he or she wishes. An individual with three children and seven grandchildren, for example, could gift up to $150,000 this year, saving up to $60,000 in federal estate taxes.