Navigating Complex Estate Planning Questions and Choices

You’re making decisions about family, money and your own unpredictable future—so it’s hardly surprising that a lot of complicated and touchy subjects come up during estate planning. There’s no one rule-of-thumb solution for navigating complex estate planning issues. 

Always talk through specific questions with tax and estate planning advisors to evaluate your options and find the strategies that work best for you. That said, we hear a lot of the same issues come up again and again. These are examples of just some of the common (yet complex) questions that people ask their advisors.  

How should I transfer my house/other real estate to my heirs?

When we talk about navigating complex estate planning decisions, real estate is often involved. There are lots of ways to transfer a home to heirs using estate planning, and each way has pros and cons. Estate tax, gift tax and capital gains considerations all come up, so it’s important to run all the scenarios. 

• There are a few ways transferring real estate using trusts can be done. One option is to create a Qualified Personal Residence Trust (QPRT) to own the property. The person you want to inherit the house is named as the beneficiary. The trust has a certain term length, during which the parent can keep living in the house. If they die before the end of the term length, the beneficiary takes ownership and the home’s value is counted toward the parent’s taxable estate. If the parent outlives the terms of the trust, the home is removed from their taxable estate. The beneficiary takes ownership and may allow the parent to keep living in the home and paying rent at the fair market value. Or, the new owner can evict the parent if they want.

• Leaving the home to kids in your will is a popular estate planning strategy. The parent gets to keep their home until the end of their life, and the heir who inherits gets a step-up in basis that should lower their capital gains tax bill when they eventually sell the home. But the estate has to go through probate first. 

• Gifting the house outright can have tax implications for wealthy parents. The entire value of the property that exceeds your annual gift tax exclusion amount is taxed, but it counts toward your lifetime estate and gift tax exclusion. Say you give away a home worth $500,000 in 2022, when the annual exclusion amount is $16,000. The remaining $484,000 is a taxable gift, but you don’t have to pay gift taxes right away. Report the gift to the IRS and count the $484,000 taxable gift toward your $12.06 million lifetime exclusion. If you don’t exceed that exclusion amount, your estate won’t be taxed when you die. This could become more of an issue when the lifetime exclusion drops back to pre-2018 levels in 2026, and more estates owe taxes. 

• Selling the property to one or more kids can be done in several ways. The kids can buy the home at fair market value. Parents may even lend them the money to afford the purchase. Or, the parent can accept a discounted price—but the difference between the fair market value and the sale price is considered a gift for tax purposes. 

How should I plan for future healthcare/long-term care costs?  

Thinking ahead to plan for future long-term care costs can be critically important. Having a plan to pay for your future medical costs helps protect the assets that you’ve set aside to pass down to the next generation. There are a few ways to use estate planning to prepare for high healthcare and long-term care costs. 

Transferring property out of your name now may help you qualify for long-term care coverage later on, if you need it. MassHealth (and Medicare programs in other states) use a five-year lookback period to determine an applicant’s eligibility. There are strict rules about how you can get rid of assets during that period. Work with your advisors to make a plan for qualifying for MassHealth. 

Your advisors can also help you determine if it makes sense for you to buy long-term care insurance and/or disability insurance. The latter can be used to help cover your expenses if you’re unable to work because of a temporary disability, in which case Social Security disability benefits won’t be available to you. 

What’s the most tax-advantaged way to build charitable giving into my estate plan?

Estate planning can be a win-win proposition for you and your favorite charitable causes. Advisors can help you find tax-advantaged strategies to make philanthropic gifts both during life and after your death. Making gifts now can get you an income tax deduction, and can have other benefits. For example, donating appreciated stock to charity entitles you to a tax deduction and spares you from the capital gains taxes you’d pay if you sold the stock. 

Leaving some of your assets to charity when you die can also be a useful estate tax planning strategy. Naming a charity as a beneficiary on a retirement account, for example, keeps that account from being added to your taxable estate. The organization gets a nice big donation and your heirs might even avoid estate taxes by keeping that extra money out of the estate. (In places like Massachusetts with low estate tax thresholds, even small amounts of money can tip your estate into taxable territory.) 

What if I own my business? 

Navigating complex estate planning issues is challenging enough when you work for someone else. But business owners have additional considerations to discuss with their estate planning advisors. What’s your succession plan? Are there partners who will buy out your share of the business when you die, and how will that affect the heirs who then inherit that money? What happens to your business debt? What happens if you’re a sole proprietor? What if it’s a family-owned business? Estate planning for business owners is important as a way to protect your professional legacy and employees, as well as your family and other loved ones. 

Navigating Complex Estate Planning Can Be Complex but Doesn’t Need To Be Daunting.

Have more questions about estate planning? Take a look at our recent ebook, “Estate Planning for Every Stage of Life,” for more. With experienced advisors who can guide you through the process, estate planning should make you feel more relaxed about an unpredictable future. No matter what comes next, you’ll know that you’ve got plans in place to protect yourself and the people you love most. 

Sachetta, LLC’s advisors are always here to help you create the financial plans that give you and your family peace of mind. Navigating complex estate planning issues is something we help clients with every day. Our extensive referral network includes top estate planning advisors, making it easy for our clients to connect with the estate planning resources they need to complement their overall financial plans. Contact us today. 

Stephen P. Ahern, CPA/PFS, CFP®, AEP®, MST provides individual financial, investment, estate and tax planning and small business consulting to a diverse base of clients including key top-level executives, high-net-worth individuals, business owners, venture capitalists, and entrepreneurs. Stephen co-founded and served as President of Wealth Management Advisors, LLC for twenty-one years before joining the Sachetta team.