Estate Planning for a Terminally Ill Client

People often ask, “When should I do my estate planning?” My tongue-in-cheek reply is, “Call me six months before you know you’re going to die, and we’ll take care of it then.”  People get the point that there is generally no “right” time to do their estate planning, but they should address the issue sooner rather than “too late.”

There are those unfortunate occasions when a person in fact learns that they have a short time to live because of a terminal condition.  While some planning strategies will be unavailable for someone having a terminal illness – for example, the terminal client will be unable to purchase life insurance – many other options remain available to achieve the client’s planning goals.

I recently met with a couple in their 60’s, who I’ll call “Mr. and Mrs. Roberts.”  Mr. Roberts was recently informed that the cancer he has been battling is no longer treatable.  Mrs. Roberts has chronic health issues, but is likely to live for many years.  Their total estate value is approximately $2.5 million, with about half of that amount in the form of two IRA’s of approximately equal value owned by Mr. Roberts.  Under their existing estate plan, all assets would pass directly to the surviving spouse (presumably Mrs. Roberts).

The main planning challenges are:  (1) to protect the Roberts’ assets in the event that Mrs. Roberts needs long-term care, and (2) to minimize estate taxes.  These two objectives are somewhat in conflict, because to achieve estate tax savings, we would typically transfer to each spouse’s name at least $1 million of their assets so that each spouse could take advantage of the full $1 million New York estate tax exemption upon their deaths. However, putting assets directly in Mrs. Roberts’ name would likely provide fewer protections for the assets than if they were to pass under Mr. Roberts’ will into a  “supplemental needs trust” established for Mrs. Roberts’ benefit.  Under federal and New York law, assets passing to a surviving spouse in a supplemental needs trust created under a will are deemed “exempt” for determining a surviving spouse’s eligibility for Medicaid long-term care benefits.

While we are just beginning planning for the Roberts, we discussed a few options at our initial meeting.  One idea is to name their two children as the beneficiaries of one of the IRA’s (worth about $650,000), since it appears Mrs. Roberts can live comfortably without it.  She would remain the beneficiary of Mr. Roberts’ other IRA, which is worth approximately the same amount.  We will likely recommend using “retirement plan trusts” for each child, which will allow each child to take the required minimum distributions (“RMD’s”) over their own individual life expectancies.  These “stretched out” IRA distributions will result in significantly more income tax deferral.  An additional benefit to the retirement plan trusts is that the RMD’s will be distributed to creditor-protected trusts for each child.

We will also likely recommend that certain assets (i.e., the residence) be transferred to Mr. Roberts’ name only.  Upon his death, those assets will be funded into a discretionary supplemental needs trust for Mrs. Roberts’ benefit, and under current law will be considered “exempt” assets for Medicaid purposes without a five-year “look back period.”  In doing so, we will have to evaluate the estate tax implications of the asset funding.

The plan will surely evolve as we and the Roberts’ engage in more in-depth discussions to fine-tune their goals and objectives.  However, the bottom line is that planning for a seriously ill client requires consideration of all the potential outcomes, and the final plan should be designed to ensure maximum flexibility to address changing circumstances.