middle income estate planning

Too often, middle income clients fail to seek the advice of a CPA because they’ve been taken in by two common myths:

Myth #1: Only the very wealthy have assets significant enough to really benefit from the services of an estate planning CPA;

Myth #2: Since the estate tax exemption increased to over 5M in 2012, only the very, very, very wealthy need to worry about posthumous tax risk, so there’s even less reason for middle income people to consult with a CPA.

We know these are myths because every year, our estate planning discussion leaders present courses packed with practical tips and creative strategies that can be used by and with middle income clients to avoid common problems and meet goals and needs. We’ve picked five of those tips to share with you in this article. Some are simple suggestions and safeguards that while not billable, show your clients you have their best interests at heart. Others are more technical strategies that can form the basis of a client service engagement. While the impacts might not be as dramatic as you might see in a high wealth scenario, they can still be significant– and all the more important because they help to make the most of limited resources.

Tip #1: Verify that residential real estate survivorship rights have been appropriately addressed, particularly if the client is or was a degreed professional.

Generally speaking, with married clients, primary residences are owned jointly and pass by operation of law to the surviving spouse through joint tenancy or tenancy by the entireties set forth in the deed to the property. However, there are cases in which, for asset protection purposes (think obstetricians, anesthesiologists, lawyers and other degreed professionals prone to lawsuits), property may be titled in the name of one spouse alone so that in the worst case scenario of a large malpractice judgment the house is not at risk. Consider the situation of a doctor who buys a house early in her career and deeds it to her husband to protect it from liability. As the years pass the fact that the deed is in one name can easily be forgotten. Now assume the husband pre-deceases his doctor wife, leaving her with no clear claim to the home in which she lives. This could end with the property being distributed as a part of the residue of the estate. For this reason, it’s a good idea to double check that the will includes language which protects residential real estate survivorship rights. That language would look something like this:

Example: I give and devise to my wife, Jane Doe, if she survives me, absolutely and free of trust, all of my right, title and interest in and to all residential real estate used by my wife or by me as a permanent or seasonal home at the time of my death, together with all property or liability insurance policies relating to such residential real estate. If my wife does not survive me, such residential real estate shall be distributed as part of my residuary estate as hereinafter provided in this Will. Make sure to ask clients how their property is deeded. In cases where the deed runs to a single spouse rather than both, ask to take a look at the will. If you don’t see language like the example above, explain the ramifications so that if appropriate, the client can visit a wills and trusts attorney and have the appropriate changes made. Your investment of a few minutes of due diligence could avoid significant stress and upheaval down the road.

Tip #2: Double-check that your clients are safeguarding critical documents, most notably their advance directive.

The typical estate documents of a middle income client consist of the will, financial durable power of attorney and advance directive (healthcare power of attorney and living will). The advance directive contains what is usually a separately drafted healthcare power of attorney naming an agent called upon to make decisions in the event of incapacity. The agent is also instructed with respect to what should or should not be done in specific medical contingencies. These instructions are known as the living will. And the agent in essence is given the power to “pull the plug.” The living will along with the healthcare power of attorney constitute the advance directive.

The originals of these documents are usually kept by the drafting attorney (to the extent permitted by state bar ethical requirements) or by the client. Many middle income clients maintain safe deposit boxes for the sole purpose of safeguarding these documents. The problem arises when the advance directive must be presented to a medical professional on the weekend or holiday when the local bank where the box is located or the attorney’s office is closed. Ask your client where they keep these documents and suggest they keep the original advance directive at home in an easy to find location. Conversations like these are not always comfortable but show your clients that you care about all aspects of their situation, not just the financials, and will likely be appreciated and remembered.

Tip #3: Take a close look at plans to gift property, and ensure your clients are taking full advantage of death basis.

When property is acquired from a decedent, Section 1014 dictates that the new basis is equal to the fair market value of the asset on the date of death. Fair market value is either the value of the property on the date of death or the alternate valuation date (six months after death or date of disposition of the property if earlier) if the estate is eligible to use the alternate valuation date and an election is made by the personal representative to use it. This rule effectively eliminates the tax on all potential gain accrued to the date of death. A beneficiary obtains a significant income tax advantage if the property has appreciated in value.

In contrast, Section 1015 states that if property is acquired by gift, the basis of the gift recipient is the same as the basis of the donor or last preceding owner by whom the property was not acquired by gift. If the adjusted basis is greater than the fair market value of the property at the time of gift, then the basis will be the fair market value.

CPAs should be mindful of this rule when contacted by a client seeking to transfer property, usually real estate, to a family member. An outright gift will frequently unknowingly saddle the recipient with the basis of the donor. Upon the recipient’s later disposition of the property, tax will be due on the appreciation of the property for the holding periods of both recipient and donor (and preceding holders as well if donor received the property by gift). Accordingly, the better result for tax savings purposes usually results from the property being willed to the intended recipient, thus ensuring stepped-up fair market basis against a later disposition. With today’s estate exclusion of $5,490,000, or $10,980,000 for a married couple, inclusion of the property is normally not a concern. Educating your clients on the tax pros and cons of gifts vs bequests can have considerable long term benefits for the clients. You might then suggest that rather than assisting with the gift transfer, your office can perform an engagement to ensure that the property is invested or otherwise positioned to best maximize its value at the time of the eventual bequest.

Tip #4: Make the most of tax free gifts of tuition and medical care.

Using the annual exclusion of Section 2503(b), middle income clients can make up to $14,000 worth of present-interest gifts to any number of persons each year without incurring tax. CPAs can also inform clients regarding Section 2503(e), which provides that a payment made on behalf of an individual, as tuition to an educational organization for education or training; or to a provider of medical care, is a qualified transfer and completely excluded from taxation. This exclusion is not limited in amount and applies independently of the annual exclusion. The payments must be made directly to the provider of services to qualify for the exemption. Payments made directly to an individual as reimbursement for educational or medical expenses incurred are taxable gifts unless the gifts are eligible for the annual exclusion. Medical expenses do not qualify if they are reimbursed by insurance, and the exclusion for tuition applies to both full-time and part-time students. Ask clients who may benefit from shedding income for tax purposes about their family circumstances to determine whether a gift of tuition or medical care might be a viable option.

Tip #5: Help clients with multiple or blended family obligations understand the pros and cons of QTIP trusts.

A QTIP trust enables a settlor to provide for a surviving spouse while controlling the disposition of the trust’s assets upon the death of the surviving spouse. Income, and even principal, is available to the surviving spouse during his or her lifetime. The QTIP trust can often make a great deal of sense for clients with children from prior marriages, since the trust allows the client to attend to the needs of a current spouse while still ensuring that designated assets pass on to their children from a previous marriage (as opposed, for example, to the spouse’s children from a prior marriage). In working with clients who have children from more than one marriage it makes sense to tactfully explore their intentions and ensure they are aware of the QTIP trust option.


We hope these tips are useful to you in building a strong relationship with your middle income clients and helping them to maximize their resources and their legacy. For the best in estate planning courses, visit the Surgent CPE website.

Jack Surgent, CPA is a graduate of Villanova University and holds a Master’s in Taxation from Villanova School of Law. A managing member at GMS Surgent, Jack services both individual and closely held businesses. Jack is also regarded as one of the nation’s foremost tax experts and, as the Founder of Surgent Professional Education, he has delivered thousands of continuing professional education training sessions to CPAs nationwide.

Nick Spoltore is Director of Tax & Advisory Content for Surgent Professional Education. Mr. Spoltore is a graduate of the University of Notre Dame and of Delaware Law School.  Before joining Surgent Professional Education, Nick practiced tax and business law at the firm of Heaney, Kilcoyne in Pennsylvania and also in Delaware.

*This article first appeared in Footnote, the Magazine of the Minnesota Society of Certified Public Accountants, and is republished with permission.

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