ESTATE PLANNING SCENARIO - Planning, Failures and the Consequences that Follow

ESTATE PLANNING SCENARIO - Planning, Failures and the Consequences that Follow
By Alan Orlowsky, Attorney at Law

This is the third series in our Estate Planning Scenarios. Let's talk about an example of Estate Planning in Chicago and some consequences that can happen.

Mary was a physically and mentally failing 88 year old widowed great-grandmother living in the northern suburbs of Chicago.  She was blessed with 6 attentive children and 38 grandchildren and great-grandchildren.....a very large family by today’s standards.  Mary’s plate was full.

Mary’s daughter, Elizabeth, solicited my services to prepare a new will and trust for her mother and to address the $1.5 million estate tax bill that would be due upon her death.  Her estate was valued at approximately $4 million.  The existing will was outdated and the trust was required to avoid probate and pass on the estate to her children. 

Mary was receptive to preparation of the will and trust which was prepared and signed, but when it came to estate tax reduction...we hit a brick wall.  I proposed to Mary that to reduce her estate tax exposure she establish a family gift trust and make annual gifts thereto.  The trust would be structured so that she would be able to use all her family members as donees by invoking the arcane, but often used, Crummy notice provisions allowed by IRS.  At this time the Annual Gift Tax Exclusion was $10,000 per donee.  Accordingly she would be able to make 38 Annual $10,000 gifts to each grandchild and great-grandchild, a $10,000 annual gift to each child and a $10,000 annual gift to each in-law - 6 in all.   As such, for each year she lived she would be able to reduce her estate by $.5 million and save approximately $250,000 in estate tax each year as well.   Furthermore, since it was October, so she could make these annual gifts before the end of the year and again on January 1^st of the following year. So in a span of 3 months we would potentially save $500,000 in tax!  In estate planning parlance...a no brainer!  And if Mary lived a few years the savings would be $1 million.

So what when wrong?  Why did Mary refuse to make the gifts?  Clearly she had sufficient funds that would last the rest of her life; even if her estate was reduced to $2 million.  After all, she didn’t live large.   Unfortunately, Mary, like many elderly folks, was afraid to give up control, was afraid she’d run out of money and afraid her children would fail to come to the rescue if she was in financial difficulty.  Irrational as this seems, it is a common barrier in planning for the elderly.   Fear trumps common sense all the time!

 

So, what can you do to prevent a parent from making an irrational decision like the one Mary made?  I suggest to my clients that they call an informal meeting (well before the parent(s) are 88) where all close family members are present to discuss the issues which concern the parent(s) and the children.  Once the issues are out on the table the foundation for rational conversation can begin.  The issues should be presented in a kind compassionate way to avoid family strife.  There will be disagreements, but it is important that honesty and rational conversation win the day.  Once this is done then it may be possible to create a timetable and framework to move forward with the planning that is needed and to bring in the professionals that will be required.  In some cases we recommend that the help of a family business counselor be present to address the psychological issues that often get in the way.  And in some situations a CPA or attorney should be present.  In any case, there is no one format that fits all families, but two rules always apply: (1) procrastination never facilitates the planning process and (2) once a parent passes there is no estate planning time machine that can help.

Sadly, Mary passed in her 91^st year without making the gifts I recommended.  We prepared the Estate Tax Return and Elizabeth paid $1.5 million to the IRS.  It was a very sobering and disappointing day.

 

If you have questions about this post or about a particular legal situation, please contact Alan Orlowsky by calling 847-325-5559 or contact us here.