THE FLEISHER PATTERSON LAW FIRM, LLC

Stewart W. Fleisher and Benjamin L. Patterson, Attorneys at LawPRACTICE LIMITED TO ESTATE PLANNING, ADMINISTRATION, AND PROBATE MATTERS

WELLS FARGO BANK BUILDING

3333 S. BANNOCK ST., SUITE 900ENGLEWOOD, CO 80110

WEBSITE: FLEISHERPATTERSONLAW.COM PHONE (303) 488-9888

FAX (303) 488-9889mail@fleisherpattersoiilaw.coin

IMMEDIATE PRE-MORTEM TAX

and ESTATE PLANNING IDEAS

When your estate plan was prepared, itwas probably drafted to accomplish yourdispositive goals if you died on that date,but it also anticipated that you may livemany more years.

And if you were married, the estate planwas probably drafted to reduce potentialestate taxes on the second death.

But once you realize that a death is near,there may be certain planning opportunitieswhich may not have been pursued whenyour estate plan was originally drafted.The purpose of this memorandum is todiscuss some of the options which may beavailable under such circumstances.

The issues raised in this memorandum are

addressed for the smaller to intermediate

size estates with typical investment assets,and do not address many issues whichmight be relevant to a larger estate or toassets with more complex planning aspects,such as partnerships, S Corporations,installment notes, non-U.S. citizen

spouses, and generation skipping transfertax issues.

One of the reasons for our preparing thismemorandum is that we often see familymembers reconunend certain actions, such

as retitling property in the names of thechildren, when such actions may have very

serious tax and other implications whichthe parent (and children) have failed toconsider.

This memorandum has been preparedbased on the assumption that your doctorhas just told you that you have only two tofour months to live. With this new

information, how might you plan yourestate and what other actions should youtake?

Personal and Medical Care Decisions:

Although you can still make your owndecisions regarding your personal andmedical care, the day may come soonwhen you cannot.

You should consider executing a living willif you haven't already done so. A livingwill is the document which says that if youare terminally ill and comatose, lifesupport equipment shall be discontinued.

You should also consider executing apower of attorney for heath care in whichyou designate those persons you wouldwant to make health care decisions for youif you are unable to do so.

Both documents should be delivered to and

discussed with your personal physician.

You should also consider nominating aguardian and a conservator in the eventthat one needs to be appointed by the courtto make personal (guardian) and financial(conservator) decisions for you. Thesenominations are often accomplishedthrough a well-drafted power of attorney.

Both of these documents are often includedin a typical estate plan. Even if you haveexecuted these documents, now would bea good time to review them in detail to seeif any changes are needed.

Funeral and Burial Arrangements: Yourdesires concerning your funeral and burialarrangements should be communicated toyour family. You may wish to considerprepaying your funeral and purchasing agrave site at this time. Such preplarmingcan save your family the hassles of tryingto make these arrangements during a timeof grief.

Moreover, it is easier to find and negotiatea good deal while you are still alive, thanit is for your family after you are gone andimmediate decisions have to be made.

Guardians: In addition to considering thenomination of a guardian for yourself, youshould consider nominating a guardian tohave the custody of your minor or disabledchildren. Has your will done so and isthat designation up to date to reflect yourcurrent desires? What if your nominatedguardian is unwilling or unable to serve, isan alternate named?

Financial Affairs while You are Alive:A durable power of attorney can be auseful document to allow someone else totake care of your financial affairs. Draftedproperly, it can and grant to the designatedperson(s) the power to pay your bills, buyand sell your property, prepare and signyour tax returns, and even make limited

gifts of your property.

This gifting power could be particularlyimportant if your estate will be subject toestate taxes upon your death.

Gifting under a Power of Attorney:Let's assume that you are single and thatyou have a taxable estate. Your agent,acting under a power of attorney withspecific gifting powers, makes gifts of$15,000 to each of your five children andfive grandchildren in December, 2018, andthen again in January. You die inFebruary, 2019, with $300,000 less inyour estate. Your family saved $120,000in estate taxes by making these gifts.

Note that the power of attorney mustspecificallv authorize the agent to makegifts of the principal's property. Thisprovision is not included in most powers ofattorney, and is not in the ColoradoStatutory Power of Attorney.

Note also that the gifts must be completed(checks must actually clear your bank)before you die. You can't hold checks ordelay transfers. Other gifting techniques toreduce estate taxes are discussed below.

Uniform Gifts to Minors Act: If youhave made gifts to minors under theUniform Transfers to Minors Act, keep inmind that if you as donor are also thecustodian for the benefit of the minor, thefair market value of such property will beincluded in your taxable estate upon yourdeath.

Consider designating someone other thanyou or your spouse as custodian, or if youare already the custodian, considerresigning before your death.

Also, when gifting, consider the manyadvantages of using Section 529 plans. Notonly can you still control the funds, canchange beneficiaries, and even get themback.

Moreover, the funds accumulate tax free ifused for higher education - and the plansare, by federal law, still excluded fromyour taxable estate.

Bank Account: Consider adding a secondperson to your bank account, not as a jointowner, but on a power of attorneysignature card. Use a joint tenancy cardonly if you want the named joint tenant tobecome the sole owner of the account onyour death.

Joint Tenancy: The concept that thesurviving joint tenant becomes the soleowner of the property is generally truewith respect to all joint tenancy property,so check on how your accounts and otherproperty are titled.

Property in joint tenancy passes only to thesurviving joint tenant(s) on your death andis not distributed pursuant to your will ortrust. You may think your son willdistribute the property to the other fourchildren, but what if your son dies shortlyafter you do? His wife may not be asgenerous. Moreover, even if he wants to

share the property with his siblings, theremay be gift tax implications. For marriedcouples, joint tenancy can negate taxplanning and other family planning aspects.

Direct Deposit of Checks: Arrange forthe direct deposit of your retirement andother checks to your bank account if youhave not already done so.Such checks could be very hard for yourfamily to cash or deposit if you are unableto endorse them.

Hint, if it is too late: Many banks willaccept checks endorsed "For deposit onlyto account of payee" if you write thepayee's name and account number on theback of the check and drop with a depositslip in the night depository.

The same check might be rejected ifpresented at the teller window. Don't askus why, but that's how it seems to work.

Direct Payment: Consider having certainbills (mortgages, utilities, credit cards,etc.) paid directly from your checkingaccount to avoid missing any payments.Consider adding a third party notificationoption to such bills as Xcel Energy so thatthe person you name will be notified if thebill is not timely paid and before service isdiscontinued.

Consider a Living Trust: Lastly, if youare concerned about incapacity and theinability to take care of your financialaffairs, you should seriously considercreating a Living Trust.

Such a trust could permit you to manageyour affairs until you are no longer able todo so, at which time your nominatedsuccessor trustee can easily take overwithout the need for a court-created

conservatorship.

Dispositive Planning: On your death willyour assets be distributed the way youwant them to be distributed? Dyingwithout a will or other written dispositiveplan can be a big mistake.

For instance, many married persons thinkthat if one spouse dies without a will,everything will automatically go to thesurviving spouse.

Laws vary greatly by state. Dependingupon your family simation, in Coloradoapproximately one-half of the decedent'sprobate estate may go to the survivingspouse and the other half equally amongthe decedent's children.

The first step is to review (or create) yourwill or your living trust.

Is your dispositive plan therein consistentwith your desires? Are your beneficiarydesignations also consistent with yourestate plan or at least with your desires?

List Assets: On a separate sheet ofpaper, list all of your assets (includingaccount numbers and location) and indicatethe approximate value and exactly how titleis held. Also indicate any beneficiarydesignations. This list of assets can behelpful both to you in planning your estateand to your family after you are gone.

Who is the Owner or Beneficiary? Weoften find that even though a person hadindicated in his will that he wanted hisassets to go equally to his children, he hadinadvertently named only one child as theowner or beneficiary. Often this was donefor convenience (that child was the onlyone in town) or because he was in a hurryor it wasn't convenient-there was onlyroom in the box for one name.

Remember, a co-signer on an account isusually the owner of the account upon yourdeath. Inappropriate designations mayresult in unequal distribution of assets andhard feelings among family members.

To Whom will your property pass? Awill only controls your probate estate.Property which passes outside of probate,such as joint tenancy property to thesurviving joint tenant, IRA and insuranceproceeds to the named beneficiaries, is notcontrolled by your will and, generally,there is no adjustment in probate for suchnon-probate transfers.

Don't guess! Check each insurance policy,IRA, employee plan, and the like. Peopleare often amazed to find ex-spouses namedas beneficiaries.

We had a client who had been married for16 years and had two children, but his

father was still named as the beneficiary onhis employee plans at work because he hadnever changed them after he got married.

Caution on Placing Property in JointTenancy: Be cautious about titlingproperty in joint tenancy with children justto avoid probate. Such titling constitutes agift; the other person becomes an owner ofyour property. If you title your home injoint tenancy with your son, you may findthat you no longer own that property withyour son, but with his creditors, the IRS oreven his ex-spouse, any one of which canforce the sale of your home to obtain yourson's share of the proceeds.

There may also be a loss of significant taxbenefits through such ownership. Forinstance, you can use your $250,000exemption only on the gain on the 50%you own, and your son would be taxed onthe gain on the other 50%.

There may be other significant adverseconsequences. A living trust can offermany of the advantages of joint tenancywithout many of the disadvantages.

Is Outright Distribution Desirable? Doyou want your beneficiaries to receive their

inheritance all at once, or would it bebetter to hold all or part of such propertyin trust until they are more financiallymature - or perhaps no longer qualifyingfor Medicaid and SSI? Your dispositivedocument such as a will or trust canaccomplish this; relying on joint tenancyor named beneficiaries typically does not.

Do you want any amounts left tocharity? If you do, consider naming thecharity as a (partial) beneficiary of yourIRA. Whenever distributions are madefrom an IRA (assuming all contributionswere deducible), they are taxable to therecipient.

The charity doesn't pay taxes on the IRAdistribution and your other assets go toyour children generally income tax free.

If you hadn't used this technique, the IRAproceeds would have been all taxable to

your children, while non-income taxableassets would have gone to the charity.

Just make sure that it is clear (in writing)that it was your intent that the naming ofthe charity as a beneficiary is in full (orpartial) satisfaction of the bequest in yourwill or trust.

Federal Estate Taxes: A married personcan leave an unlimited amount to a

surviving spouse (who is also a U.S.citizen) and incur no federal estate taxesbecause of the unlimited marital deduction.In addition, anyone can leave up to$11,180,000 (in 2018) to anyone and incurno estate tax because of the estate tax

exemption. There is also an unlimitedcharitable deduction. The value of anyproperty you leave in excess of

$11,180,000 and which is not eligible forthe unlimited marital or charitable

deduction is subject to the 40% estate tax.

Your Gross Estate: Your taxable estate isfar more encompassing than your probateestate. Your taxable estate generallyincludes everything that you own orcontrol at your death, including the deathbenefit of your life insurance. Consultwith an estate tax planning attorney if yourspouse is not a U.S. Citizen or if yourestate is anywhere near $11,000,000.

Estate Tax Planning for the MarriedCouple: You could leave your entireestate to your surviving spouse and therewould be no estate taxes on your death,but on the death of your surviving spouseall of your assets as well as your spouse'sassets will be subject to estate taxes at thattime.

A living trust with a "credit shelter trust",sometimes referred to as a "Family Trust"can provide for a surviving spouse, but notbe included in the surviving spouse'staxable estate. Such a trust can also

preserve an inheritance for the decedent's

children by a prior marriage.

For many couples such planning may havebeen needed many years ago when theestate tax exemption was only $600,000 to$1,000,000. The estate tax exemption wasincreased to $11.18 million in 2018, and asa result, this type of planning is obsoleteand their estate plan should be amended todelete the requirement that such trust becreated on the first death. Another reporton our website covers the disadvantages ofsuch planning in greater detail.

Another often more attractive option is tofile an estate tax on the first death, even ifone is not required, so that the survivingspouse's exemption on his or her death canbe increased by the unused exemption ofthe deceased spouse.

This concept is sometimes referred to as"portability" and can be used as asubstitute - or to compliment - for familytrust type planning. There is a separatereport on this topic on our website.

Example: John dies in 2018 and leaves hisentire estate to his wife Mary. Mary filesan estate tax return for John, and claimshis entire exemption amount.

When Mary dies, her estate tax exemptionwill be increased by $11,180,000. If shedied in 2019, she could leave over $22million to their children estate tax free.

Surviving spouse's need to be made awareof this requirement to timely-file (within24 months) an estate tax return after thefirst death.

Gifting: But what if your are single? Orif you and your spouse have a combinedestate larger than $22,000,000? How canyou minimize estate taxes? The primarymethod is through gifting.

The Internal Revenue Code provides thatyou may gift up to $15,000 (2018) peryear per donee without filing a gift taxreturn. Thus, a married couple with twochildren and four grandchildren could gift$180,000 per year. And that's withoutmaking any gifts to the children's spouses.Obviously, a regular gifting program cansignificantly reduce your taxable estate.

Any gifts in excess of $15,000 per doneeper year will reduce the $11,180,000exemption available on your death, dollarfor dollar.

Payments of medical bills and tuition forothers (such as children and grandchildren)are also exempt from gift tax if thepayments is made directly to the healthcare provider or educational institution,respectively. You cannot give the funds tothe child to pay the bill. The tuitionexpense exception is limited to tuition onlyand does not cover books, living expenses,and travel.

Another gifting option is to Section 529plans as discussed earlier in this report.There is a separate report on 529 Plans onour website.

If you have a taxable estate and areterminally ill, you should considermaximizing gifts to the extent possible. Ifsuch gifts tend to favor one branch of thefamily, you may wish to provide anadjustment for such gifts in your will ortrust.

Non-Cash Gifts: Gifts do not have to be

made in cash; you can gift almost anyproperty, including shares of stock, partial

interests in real estate, stamp collections,partnerships, and the like.

It is usually best to make gifts early in theyear to obtain the benefits before the donordies, before congress changes the rules,and to remove the earnings or appreciationfrom the taxable estate of the donor.

Assets with the greatest growth potentialshould be given away first, althoughproperty which has already grown in valueshould be retained until death. Step-up inbasis is discussed below.

Loss Property: Just as you should not giftappreciated property, you should not giftproperty in which you have a loss. Ratherthan gift property in which you have aloss, you should consider selling it andgifting the proceeds.

The reason for this that the basis for

calculating gain on gifted property in thehands of the donee is the lower of the

donor's basis or the fair market value on

the date of gift. The tax deductibility ofthe loss will be lost if you gift lossproperty.

Even if you don't plan to gift lossproperty, consider selling it today torecognize the loss rather owning it on yourdeath. The loss can be deducted from

other gains and income (within limits) ifsold while you are alive, but will receive a"step-down" in basis on your death.

After you are gone, neither you nor yourheirs will be able to deduct the loss.

Worthless Securities: If there is nomarket for a "worthless" security, sell it toa non-family member (your broker orattorney) for one dollar. Keep copies ofthe documentation for tax records. You

generally carmot take the deduction untilthe property is sold.

Appreciated Property: On the otherhand, you should generally continue tohold appreciated property until you die.

Do not gift such property. Such propertywill receive a step-up in basis upon yourdeath.

Section 1014 of the Internal Revenue Code

requires "basis" (think of that as your costfor calculating gain) adjustment on yourdeath to the fair market value on your dateof death.

For example, you purchased ICQ shares ofstock many years ago for $10 per share.Today it is worth $100 per share. If yousold it today, the gain of $90 would besubject to capital gains tax of perhaps 25 %(including state tax), and $25 in tax pershare would have to be paid.

The result would be the same if you hadgifted such stock will you were alive, andregardless of whether the donee sells thestock before or after you die, the donee'sbasis will be your basis, and the tax on thedonee's gain will be the same as it wouldhave been in your hands (assuming thedonee is in the same tax bracket).

But if you continues to hold the stock andleave if to your family upon your deaththrough your will or trust or otherwiseincludible in your taxable estate, there is a"step-up in basis."

That means that when your family sells thestock after your death, their basis forcalculating gain is the fair market value onyour death. Thus, if the stock was worth

$100 on your death and it is subsequentlysold for $100, there is no taxable gain! Ifit is sold for $120, the gain would only bethe $20 increase after your death.

Step-up in basis is one of the last major"loopholes" for completely avoiding tax.

unfortunately you have to die to benefitfrom it!

Step-up in basis is applicable whether ornot the decedent had a taxable estate.

Thus, the general rule is, never giftappreciated property. Also note that ifproperty is owned in joint tenancy withyour spouse, only your 50% receives step-up in basis. There is a more detailed reporton step-up in basis on our website.

The Terminally-ill SHOULD ownproperty: This concept leads us toanother planning technique which is justthe opposite of what most people do.Let's assume you own a rental property.Not only has the property appreciated fromwhen you purchased it, but you has alsotaken depreciation for many years. Theproperty is worth $500,000; your basis isonly $100,000.

If you were dying, some friend maysuggest that you transfer your rentalproperty (which we will assume that youown jointly with your wife) out of yourname and into your wife's name. By now,of course, you realize that doing so wouldbe ill-advised due to the loss of step-up inbasis.

But what about retitling the entire propertyin your name if you are terminally-ill?

That is often a good idea, but keep in mindthat the tax law provides that if thetransferee dies within one year of the giftand it goes back to the transferor (yourwife), then step-up in basis is denied onthat interest so transferred.

But even if you die within one year of thetransfer, tax wise you are no worse offthan if the transfer had not been made. So

you either have to live one year, or leavethe property to someone other than thetransferor.

Example: Assume you and your wife havea sizeable estate, including the abovementioned rental property being owned injoint tenancy and which your wife won'tneed after you are gone. Your wifetransfers her interest in the property toyou. You change your will or trust toleave it to your children. On your deaththe children inherit the property with a fullstep-up in basis, even if you die just oneweek after your wife transfers her one-halfof the property to you.

But you might wonder if there is anyadvantage of step-up basis if the rentalproperty will "never" be sold. The answeris yes, because when your wife or childreninherit the property, they can start takingdepreciation all over again just as if theproperty had been purchased from anotherparty on your date of death.

Thus, there are tax reasons whyappreciated property should not betransferred out of the terminally illperson's name, but there are reasons whyyou might be to transfer property INTOhis or her name.

Community Property: Colorado is not acommunity property state, but manywestern states are.

Those include Arizona, California, Idaho,Louisiana, Nevada, New Mexico, Texas,Washington, Wisconsin, and Alaska,

Because community property is subject toa more favorable step-up in basis on thefirst death, you and your spouse shouldmake sure that such property will still berecognized as community property. This isparticularly important if you once lived ina community property state but have sincemoved to a non-community property state(such as Colorado). Be sure to discuss thisaspect with your estate planning attorney.

Deduction Carry-Forwards: If you havenet operating loss or charitable deductioncarry-forwards, or unused investment taxcredits or other deductions which would be

loss at death, you may wish to causeincome to be recognized before you die inorder to obtain the tax benefits of such

items.

Income with Respect to a Decedent: Ifyou are in a lower tax bracket that yourchildren or other beneficiaries, you maywish to accelerate the taxation of certain

taxable items while you are alive, forinstances, by cashing in Series EE savingsbonds or making withdrawals from IRA's.These assets are not eligible for step-up inbasis and are treated as income with

respect to a decedent, and thus taxable tothe recipient.

Favorable Negotiations: Consider tryingto sell or at least negotiate a sales pricebefore your death on assets you own forwhich you could get a better price or morefavorable terms that your family couldafter you are gone. Minority interests in aclosely held business or partnership areexamples of such interests. Collectiblesmight be another example.

For example, the person who has collectedstamps for 40 years is likely to be moreknowledgeable about his stamps values andwhere to get the best price that would hisson who only emails and has never boughta stamp!

Other Income Tax Aspects: If asubstantial portion of your income isderived from a partnership, discuss the taximplications of income tax allocations atyear end with your tax advisor. If youown stock in an S corporation, reviewyour documents to ascertain that the

ownership of such stock after your deathwill continue to qualify for S corporationstatus.

Consolidation Of Accounts: If you ownaccounts in several banks, we wouldencourage you to consolidate your accountsto make things easier for your family lateron. Similarly, if you own stock certificatesin numerous companies, consider holdingrecord title in one (local) brokerageaccount. That will make things mucheasier for your family upon your death ordisability.

Insurance: Although you may not be ableto qualify for a new policy, review yourexisting policies to see if they offer anyoptions to increase coverage.

Be sure to keep all policies in force. Somecredit cards offer life insurance on the

outstanding balance without insurability.

Such insurance is very expensive for thosein good health, but may be a great buy forthose who are terminally ill. Run up alarge balance and make minimumpayments. Credit unions often offer life

insurance for long time depositors, a dollarof insurance for each dollar of deposit. Becautious about closing out such accounts.

Medicaid Planning: This memorandumdoes not discuss nursing home/Medicaidplanning which is a whole separate topicand is best discussed on an individual basis

as the rules are constantly changing.

We hope this memorandum has given yousome food for thought - and the motivationto act - with respect to planning the estateof someone who is terminally ill.

This memorandum is intended to begeneral in nature and not to recommendspecific legal or tax advice. The purposeof this memorandum is to merely discussin general terms some of the estateplarming options which you may wish toconsider when death appears to be near.

Each person's situation is unique, and whatmay be recommended for one person maybe inappropriate for another person. Thereis no substitute for competent legal advicewhen it comes to estate planning.

This summary ofPre-Mortem Planning wasprepared by The Fleisher Patterson LawFirm, LLC and is intended to give generalinformation, and not specific legal advice.

Our law practice is limited to EstatePlanning. For a consultation regardingyour pre-mortem planning opportunities,call 303-488-9888 and ask to speak withBen Patterson.

®2018