The Critical Year


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A Guide to Tax and Legal Planning For Persons Immediately Before Death and Shortly Thereafter

The period immediately before and shortly after a client’s death is crucially important for the client, the client’s family, and his or her professional advisors. Not much planning can be done (other than advanced planning) when a client’s death is sudden or unexpected. Increasingly, though, the progress of modern medicine has produced an extended twilight for many clients, and as a result, there is a longer period for planning – – often under stressful circumstances.

Though the client’s personal circumstances can be difficult, the planner, whether lawyer or other tax professional, can play a useful role for clients and their families here. Many opportunities present themselves for planners to unlock tax and other economic benefits during this period. Also, after the client has died, it is important to get the administration of client’s estate or now irrevocable trust off to a good start. There is enough trouble in the client’s family without having to worry about how the money is going to come in and go out or where the records are kept.

The purpose of this presentation is to give you, as tax professionals, a closer idea of what can be done during this critical period. We’ll touch on legal matters – – what I do – – but in a way that will involve numbers and tax approaches – – what you do – – so we can work more efficiently together. Where relevant, I will show you the legal papers behind some of the tax-driven measures connected with deathbed planning and estate administration, because law and tax are interrelated: tax and probate law drive the numbers, but the numbers also drive legal approaches that we undertake on behalf of our clients. I note at the outset that while I base my observations on nearly 40 years of law practice in the estates area, the materials in this outline aren’t meant to be exhaustive. You know tricks that I don’t know, and I’ll be interested in learning about them. That is why we are here.

In this presentation I’m going to handle things in three stages:

  1. ADVANCE PLANNING meaning steps we can take with our clients – – possibly years in advance – – to get ready for end-game planning.
  2. DEATH BED PLANNING meaning planning during the three-month period before death, which, while an arbitrary measure of time, could give planners and their clients an opportunity to rearrange matters in an advantageous way for the client’s family. Sometimes, of course, we will have only a month or less in which to help here.
  3. POST-DEATH PLANNING for the first nine months of estate or (formerly) revocable trust administration. While I use the nine-month period to round out the “critical year,” my choice of nine months isn’t entirely arbitrary, as this is the ordinary due date for the filing of estate tax returns.

Now to look at these subjects more closely:


Especially when clients get older, we should have a number of potential steps planned out in advance so that they don’t have to be taken on a rush basis. Also, it is a good way for us to work together productively for the sake of the client and his/her family. The reason why working together makes sense is that (for example) the lawyers might think that they is doing the best for the client, but acting on only partial information, which can only be provided the client’s tax professionals. We lawyers can be good at setting up legal structures, entities and providing the words of plans, but we do not often have access to the “music” of the client – the hard information that tax professionals know from their year-to year, if not day-to-day fingertip command of the client’s financial information (e.g., tax basis information). Zeroing in on some of these advance areas, let’s consider the following:

Power of Attorney/Statutory Gifts Riders
Clients, especially ones of substantial means, should give a trusted person or persons a power of attorney (POA). I view this as a mandatory step, because unpleasant and inefficient things happen in New York (in the form of an Article 81 proceeding to appoint a guardian under the Mental Hygiene Act) without a power of attorney – – if a client is incapacitated and unable to act on his own.

Let’s take a closer look at the New York statutory power of attorney carried below:

Changes to the New York General Obligations Law governing powers of attorney, enacted in 2001, allow a persons to supplement powers of attorney with a statutory gifts rider (SGR). With an SGR, the client’s agent can make annual exclusion gifts under the Internal Revenue Code — or even larger gifts – – especially where the client has become incapacitated. The agent can also be empowered to engage in a broader range of estate planning moves, including the creation and funding of revocable and irrevocable trusts.

POAs/SGRs work best if there is a pre-arranged plan for how to use them. So we have to consider what assets belonging to the client might be transferred for tax advantage, and how, mechanically, these transfers can be effected. It helps if the attorney and tax professional (and also possibly the investment advisor) can identify and possibly even segregate assets and accounts that would be the subject to future death bed gifts and have the agent, under the POA/SGR, primed to take action.

Of course, as part of planning for any end-game, we need to review the client’s estate plan, and gauge the client’s (or the agent’s) interest in carrying out tax planning – – the sooner the better. And our planning has to be in keeping with the client’s own personal, family and charitable objectives. After all, tax planning of the sort we are discussing isn’t the sole objective of estate planning, it’s just an aid to getting things done efficiently and economically, to accomplish the client’s goals. We have to pay at least periodic attention to the client’s plans, perhaps a lot more frequently than we do with clients who are 50, largely so that everyone can try to handle final planning well in advance. The more we help the client do sooner is the less we have to rush when the client’s time is short.


Let’s say that the client’s matters have not been planned in advance, and we are faced with a client is likely to die over a short period. We only have a few months or weeks to help the client and client’s family to make things easier and more efficient after the client’s death. And we will not just be called on to assist in bloodless, technical planning matters. We will by necessity have close, personal dealings with clients and their families under the most difficult circumstances, which we will have to handle with decency and humanity and a maximum respect for the client’s dignity – all while getting our technical job done. This is hard work. In some sense, the technical stuff of this presentation is the easy part.

A.  Review of Client’s Estate and Financial Plan

We should find out where the client’s original Will (or trust document) is kept and review a copy of all relevant papers. We have to check these instruments for “reality” – in terms of whether the legal document actually operates on the assets in question. For example, the creation of a testamentary trust won’t mean much if all of the client’s assets are held in a transfer on death account, and will pass automatically to named persons on the client’s death. If a power of attorney doesn’t turn up (and with it, a statutory gifts rider), we may have to take steps to help the client execute these instruments and to get them recognized by financial institutions, especially if the client immediately needs an agent to help him manage his affairs. In this connection, I note that while Powers of Attorney properly executed before 2010 under the “old” law can still be valid, these powers by definition cannot enable a SGR. So the client may have to execute and updated POA/SGR.

Once we have gotten the relevant estate planning instrument in hand, and are familiar with the client’s personal assets, we have to think about some of the matters listed below as potentially useful ways to use the tax laws to benefit the client.

B.  Estate Tax Considerations

Unless the client has more than $5,250,000 in taxable assets ($10,500,000 for married clients), dealing with the federal estate tax has largely been removed as a planning imperative, thanks to the American Taxpayer Relief Act of 2012 (ironically but perhaps fittingly enacted in 2013). And unless Congress takes back this exemption, there is going to be an inflation adjuster that keeps boosting the federal estate tax exemption on an annual basis. (Do I think that the exemption will be rolled back? Not likely, but I do think there will be a backdoor attempt to boost tax by limiting the amount of step-up in basis at a client’s death, and this will show up within the next few years.)

C.  Other Tax-Related Measures

(i)  Charitable Dispositions

If a client’s plan contains charitable bequests, think about the following measures:

(a) Use IRAs, and not Will or trust bequests, to make charitable bequests. The charities involved won’t pay income taxes on them, as opposed to individual beneficiaries. Take, for example, the client whose Will leaves $100,000 to charity and the balance of his estate to his son and daughter. If the client has an IRA, he should strike the bequest to charity from the Will, and instead designate the charity as beneficiary to receive the first $100,000 of IRA proceeds. Under this approach, an added $100,000 will pass to the son and daughter ($50,000 each) on an income tax paid basis instead of getting IRD. The charity getting the IRA isn’t affected by the income tax.

(b) Consider the case of a client whose estate will not be subject to federal estate tax, and who wants to make charitable bequests. If he has spouse (or children) who will likely survive and who can be trusted to honor the client’s wishes, think about restructuring the client’s will or trust plan to leave the spouse/children the bequest originally bequeathed to charity, while indicating that the legatees are encouraged (morally bound) to use the bequest to make charitable gifts. Such a provision must of course not be legally binding.

Why is this a good idea? Because quite frequently, where a client is survived by a spouse, charitable bequests produce no or little estate tax savings – – there’s either no Federal estate tax, or at worst New York estate taxes levied at fairly low marginal rates. By contrast, a charitable income tax deduction is worth obtaining for the client’s surviving spouse or children. Their gift of their bequest from the client produces far better after-tax results than if the client simply names a charity to take a bequest in her will. Consider the following smart charitable bequest.

(c ) Where the client can’t make use of an IRA (or similar plan) beneficiary designation, he or she should try to use pre-residuary dollar bequests in Wills and trusts to “cash out” charities. If possible, the client should avoid residuary or balance-of-trust dispositions (especially of small percentages), because the New York State Attorney General’s office necessarily become a party to the settlement of the account of the client’s executor and trustee where there is a residuary bequest. To get around this, encourage the client to leave a pecuniary (fixed dollar denominated) bequest to charity instead. It’s much simpler. As an example of what not to do, consider this:  Article Five: Distributions after Death of Settlor.

(ii)  Securing a basis step-up

While some might find this ghoulish, gifts of highly appreciated property made to a person in poor health can produce big tax benefits. The reason for this, of course, is the step up in basis available under Section 1014 of the Internal Revenue Code for property passing through the taxable estate of a decedent. While Section 1014(e) of the Code denies a basis step up for property that is bequeathed back to the property’s donor within one year of the original gift, one can fairly easily avoid this trap if the donee bequeaths the property to non-charitable legatee who is not the original donor. Also, a bequest to a discretionary “sprinkle” trust for the original donor and other beneficiaries may work in avoiding the application of 1014(e), even if the donee’s death occurs within the year.

What sort of client can benefit from this type of planning? Consider a gravely ill client, who jointly owns her principal residence, with her husband. In this case, it’s a Manhattan co-op with a tax basis of $200,000 and current market value of $4,000,000. If the client’s husband survives her, and owns the property as a surviving joint tenant, his capital gains exclusion ($250,000), plus the step-up in basis to the property of $2,000,000 by reason of his wife’s death, will not provide a shelter from capital gains tax on a sale after the predeceasing wife’s death.

For an excellent discussion of section 1014(e) avoidance, see Mancini and Harris, “The Rest of the Story: Income Tax Issues Related to Transfer Tax Planning with Grantor and Non-Grantor Trusts” (pp 6-8)

(iii) Gifts to Reduce New York Estate Tax

New York clients holding significant wealth –- meaning ideally a federal taxable estate – – would do well to make lifetime gifts of cash or non-appreciated assets, especially if they are terminally ill and no longer need the assets for their support. Ideally, these gifts should sop up anything that remains of the client’s $5,250,000 in gift and estate tax exemption. New York of course has no gift tax, so its limited $1,000,000 exemption is irrelevant.

Take for example the agent who acted in 2012 under a statutory gifts rider and made a $4 million gift for a gravely ill person with $20 million in assets. The client was 100 years old and in poor health. Many of his assets were cash or cash equivalents (this is an important factor).

The additional $4 million death bed gift, while an “adjusted taxable gift” for federal estate tax purposes, did not enter into the calculation of New York estate tax after the donor’s death. The estate therefore realized sizable New York estate tax savings between a $16 million taxable estate (plus $4 million in adjusted taxable gifts) and a $20 million taxable estate (had no gifts been made):

A.  $20 million taxable estate (no deathbed gift)

$4,274,620    Federal estate taxes due
$2,666,800    NYS estate taxes due
$6,941,420 Total

B.  $16 million taxable estate with $4M in deathbed gift

$4,498,620    Federal estate taxes due
$2,026,800    NYS estate taxes due
$6,525,400 Total

Total savings produced by deathbed gift (A – B):



    • Why does Federal estate tax increase, and New York estate tax decrease (though there is net savings) through deathbed gifts?
    • Why should the deathbed gift approach only be used for cash or non-appreciated assets?


It’s most important to get things going shortly after the decedent’s death, both for family psychological reasons (the survivors don’t need financial confusion to add to their feelings of grief over the loss of their loved one) and financial reasons (drift and indecision are dangerous – and a decedent’s assets accounts are often frozen upon his death). Attorneys for the estate (or a trust that became irrevocable upon the client’s death) and the tax professional involved with the estate/trust administration should work quickly, and together, to help deal with this situation.

If the deceased client had concentrated holdings of highly appreciated assets (which she could not sell during life because of the lock-in effect), the executor has to act fast
to free up these assets, so they can be sold (finally!) at no capital gains cost. I cannot overemphasize the importance of diversification and asset protection here.

I’ve been asked to give you a summary of the probate process, from a legal standpoint, and a glimpse at legal papers that are frequently relevant. So here one is, with a timeline for both “legal” and “tax” steps we need to coordinate:

LEGAL MATTERS (for us laywers)

During the First Month After Death:

    • Take the Will to Surrogate’s Court for Probate, and if the Petition cannot be quickly granted, because of delays in serving citation upon nearest family members, get “preliminary letters testamentary”, which will allow the administration of the estate to go forward.
    • Here are some probate papers, including an interesting “Affidavit of Heirship” that may be necessary if the client has a small family.
    • Prepare table of assets and cash requirements for estate, including tax projections.

Four Months After Death:

Six or Seven Months After Death:

    • Petition for Advance Payment of Executor’s Commission to split receipt of commission into more than one year.
    • This proceeding often not and entertained until the end of the year. Calendar filing on November 1st at latest.
    • Make sure that Order is followed and that executors are actually paid before the end of the year.
    • Executors can only get partial commissions with leave of court. Here are specimen court papers.
    • File estate inventory in Surrogate’s Court within six months of letters testamentary or preliminary letters, whichever is earlier. This period may be extended if estate tax returns are to be filed – which will be likely in many cases.
    • Here is the statutory Inventory of Assets.
    • Surviving spouse’s right of election must be filed within six months of issuance of plenary (not preliminary) letters to executor or administrator.
    • Pay cash legacies against Receipt/Refunding agreements (unless there is insufficient cash to pay estate taxes and administration expenses).

Nine Months After Date of Death:

    • Prepare and file Renunciation and Disclaimer Surrogate’s Court within nine months of decedent’s death and obtain stamped receipt.
    • Here are Renunciation and Disclaimer court papers.


TAX MATTERS (For tax professionals)

During the First Month After Death:

    • Consider estimated tax payments for surviving spouse. Find out whether surviving spouse is US citizen and obtain proof of same.
    • File notice of fiduciary relationship, IRS Form 56.
    • Obtain taxpayer identification number through IRS Form SS-4.
    • Get the attorney and tax Professional on Federal and New York State income and Estate tax powers of attorney (Form 2848 and Form ET-14).

Four Months After Death:

    • Consider whether the estate should be on fiscal year or calendar year. Strategic choice of fiscal year. 645 Election.
    • Consider execution of waiver of commissions by executor.

Six to Seven Months After Death:

    • Computation of commissions. Prepare to send Form 1099 to Executor who has taken advance.
    • Consider extension of time to File Federal return (Form 4768).
    • Consider deferred payment of Estate tax because of closely held business assets under Section 6166 (Federal and State).
    • Consider extension of time for filing/payment federal estate Tax (Form 4768).
    • Consider additional time for filing/Payment of New York estate tax Return(Form ET-133).
    • Consider use of alternate valuation date under Section 2032 (up to six months after date of death if aggregate estate values are lowered and estate tax can be reduced thereby).
    • Consider Disclaimers/Renunciations under IRC Section 2518 and New York EPTL 2-1.11. Do legatees really need their legacies? Is there strategic gift tax purpose to disclaiming legacies?

Nine Months After Date of Death

    • File estate tax returns (Federal and state) make tax payments or otherwise obtain extensions.

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