The practice of “estate planning” covers a broad range of topics, one of which is accounting for gift and estate taxes. From the inception of the estate tax until the early 2000s, when the exemption amount was less than a million dollars, this was a facet of estate planning that practitioners had to evaluate in almost every estate plan they prepared. Almost anyone with a paid off home, a retirement account, and life insurance faced a potential estate tax liability. In 2024, with the exemption at a record high of over $13.61 million ($27.22 million for married couples) the percentage of taxpayers with an estate that is expected to be subject to the estate tax has significantly decreased.[1] While practitioners should certainly still consider the potential applicability of gift and estate taxes to an estate plan, especially given the currently planned sunset of many of the benefits provided by the Tax Cuts and Jobs Act of 2017, P.L. 115-97, which doubled the lifetime exemption amount, estates expected to be valued well under the post-sunset lifetime exemption amount (estimated to be in the $7 to $8 million range after inflation adjustments) can focus on other items that may have traditionally been missed when the threat of a 40% gift and estate tax is looming (and, when exemptions were much lower, wealth transfer tax rates were as high as 55%). Special thanks must be given to Gray Edmondson for co-authoring this article and to Charles Allen for his prior article, which served as the foundation for this writing.[2]
Income Taxes
Some of the planning undertaken to avoid gift and estate taxes can have a negative effect on income taxes for the eventual beneficiaries of the estate. For example, under Section 1014 of the Internal Revenue Code, the basis of property in the hands of a person acquiring it from a decedent is the fair market value of the property as of the date of the decedent’s death. This is often referred to as the “basis step-up” although it should be noted that since basis is adjusted to fair market value, it can either be stepped up or stepped down. Thus, where possible, clients whose taxable estate is less than the estate tax exemption should attempt to increase the fair market value of the assets included in their gross estate so as to maximize the basis step up available for the beneficiaries who will eventually receive those assets. For instance, recommending that clients consolidate voting control in closely held entities ensures that a lack of control discount should not apply to such interests, and therefore a higher valuation and step-up will result. Where ownership interests in a business have been separated into voting and non-voting (financial only) interests, consolidation of the two into one class of interest that contains both voting power and financial interests can likewise result in a higher valuation.
Further, clients may be able to use the increased exemption amount to include assets in a parent’s estate, or that of another family member with a shortened life expectancy and obtain the benefit of a basis step-up by passing assets through such family member’s estate. This is subject to an exception that applies if the family member dies within one year of the client gifting the property to the family member.[3] For this and other reasons, structuring these transactions can require some additional planning steps. However, the value can be significant. For a detailed discussion of how the focus on estate planning has changed in recent years to maximize the step-up, see Josh Sage’s recent article.[4]
Business Succession
Maintaining ownership and voting control in the proper hands is crucial to the long-term success of businesses. Without proper succession planning, business interests may be transferred to unintended recipients or unintended persons could end up being partners with each other. A client and their partner may be best friends and may have been in business together for 30 years, but the client may not want to be in business with his partner’s spouse or children after the partner dies. Some of the client’s children may work in the business while others do not. Children working in the family business typically do not enjoy having their non-participating siblings tell them how to run the business they just inherited. Of course, any number of other complications can arise. Proper estate planning and the use of appropriate clauses in governing documents or a buy-sell agreement, coupled with a viable valuation and funding mechanism may prevent the business from passing into the wrong hands, incapable hands, or in a way that results in the likelihood of disputes. Such planning can also be structured to provide a deceased owner’s family with the financial benefits of the decedent’s ownership interest while maintaining active control of the business in the surviving business partner or to appropriately structure passing the family business to children.
Blended Families
In estate planning, the term “blended families” generally refers to families where the clients have remarried and one or more of them have descendants from previous relationships. Effectively planning for second marriages is often fraught enough, but when the potentially contrasting interests of the clients regarding the beneficial interests of differing descendants is added, emotions tend to run high. Effectively navigating the proverbial mine field of estate planning for a blended family can provide much needed stability and reassurance to clients. Often clients in blended families are concerned with the survivor’s ability to unilaterally alter the plan after a first death in favor of the survivor’s descendants and at the expense of the predeceased spouse’s descendants. The benefits and weaknesses of marital trusts, life estates, and joint revocable trusts, among other strategies, should be discussed with clients to alleviate these concerns. At least one potential solution is a properly structured joint revocable trust, which becomes irrevocable in whole or in part after a first death, as it allows flexibility while both clients are alive and competent but prevents alteration of the plan after a first death except as specifically allowed under the trust’s terms.
Probate Avoidance
The probate and estate administration process, while often the subject of horror stories among the general public, is undeniably an extra expense for an estate and work on behalf of the executor or administrator. Further, probate assets, identity of beneficiaries, and other private information, can become a matter of public record. Additionally, even with a traditionally simple estate, the probate process will typically take at least four months, likely longer. This is additional time that the beneficiaries of the estate generally must wait before they can begin to enjoy their inheritance. These concerns are only exacerbated where the decedent owned assets in multiple jurisdictions, such that ancillary probates are required. Further, administering more complex assets, such as a closely held businesses, rental properties, or other assets requiring ongoing management, often requires more interaction with the courts in a way that causes additional expense, delay, and public filings than necessary when probate can be avoided.
The probate and estate administration process can typically be avoided entirely, but the amount of effort necessary to ensure such avoidance depends on the nature of the client’s assets and how they are held. For instance, many financial assets such as bank accounts, brokerage accounts, retirement accounts, etc. can all be passed via some form of beneficiary designation or a payable/transfer on death provision.[5] Most joint accounts will, by default, pass outside of the probate estate to the surviving owner.[6] Similarly, Mississippi now allows real property to be deeded via a transfer-on-death deed.[7] Of course, real property can also be titled as joint tenants with right of survivorship or deeded subject to a retained life estate, however both of these options require the current owner to be willing to part with at least some interest in the property during their lifetime.
Also, a revocable trust can be created by the client to hold any assets which the client is able to validly transfer during their lifetime, including real property located in multiple states. It is worth noting that a revocable trust may be able to be funded by an agent under a power of attorney which either specifically grants such a power or is otherwise broad enough in scope.[8] Most of these options allow the client to retain complete control and enjoyment of their assets while they are living, but provide for a simpler transfer procedure than going through the full court supervised probate and estate administration process. Of course, the downside is that the client must make an active effort to ensure that all of their assets are going to transfer appropriately, whether that be by adding the aforementioned beneficiary designations or by funding the revocable trust. Likewise, there are other consequences to many of the options of structuring assets to avoid probate that must be properly considered. This can be thought of as the client pre-performing much of the probate work, instead of leaving it to an executor to handle. Some clients may prefer to avoid the headache and let their eventual executor and beneficiaries sort everything out via the probate and estate administration process. Others desire to avoid probate whether to simplify administration, reduce costs, maintain privacy, or otherwise.
Incapacity
Incapacity, while an undesirable outcome for anyone, should be properly accounted for in any estate plan. If not properly planned for prior to the client becoming incapacitated, a court appointed guardian and/or conservator is often required to manage the client’s person and his or her finances. Durable powers of attorney allow the client to designate those individuals they would like to act as their agents, and may be either springing, meaning they only take effect once the client has actually lost capacity, or effective immediately, meaning that the agent has authority to act as the client’s agent from the date the power of attorney is executed.
Generally, at least two different durable powers of attorney exist in Mississippi, one for financial affairs and another for healthcare decisions.[9] As they sound, a durable power of attorney appoints an agent to transact the client’s financial affairs and a durable power of attorney for healthcare (referred to in the statute as an advanced health care directive) appoints an agent to make medical decisions when the client is unable to do so for themselves. The power of attorney for healthcare further allows the client the option to declare his or her intent that medical treatment be either provided or withheld in an end-of-life situation. The same document often allows medical records to be accessed by the client’s agent in the event of incapacity. Both durable powers of attorney may be modified to accommodate the client’s wishes.
The average private pay cost of a nursing home in Mississippi is now $8,300 a month.[10] Thus, incapacity planning should extend beyond who will make decisions for the client in the event of incapacity and should consider how the client will pay for care in the event they become incapacitated. Practitioners would be well advised to discuss the costs and benefits of long-term care insurance policies with clients, and where applicable, provide clients with assistance obtaining such policies and/or review existing policies. Also, as discussed below, planning for Medicaid qualification may need to be considered.
Medicaid Planning
For many clients, applying for Medicaid benefits will be the only way they can afford to cover the costs of care in their later years, while others could possibly afford to pay for several years but would rather engage in Medicaid planning to become eligible for Medicaid benefits while preserving as much of their assets for their descendants as possible. In order for an individual to qualify for Medicaid, they must meet specific income, resource, and transfer requirements.[11] While an in-depth discussion of these requirements is beyond the scope of this writing, suffice it to say that the resource requirements allow only a very small amount of assets to be owned by the individual ($4,000 for an unmarried individual in Mississippi in 2024).[12] Thus, a significant challenge for many clients attempting to qualify for Medicaid is ensuring that their assets are below the resource requirements. Fortunately, this resource limit does not include the value of certain “excluded assets” such as the individual’s home, household goods, personal effects, automobile, prepaid burial plot, and other assets.
As an additional hurdle, there is a sixty-month lookback period for transfers made before the individual applies for traditional Medicaid benefits (although different rules potentially apply to other Medicaid programs such as certain Medicaid Home and Community Waiver Programs).[13] Generally, this means that an individual who made certain transfers for less than fair market value within sixty months of their application for Medicaid, and who would otherwise be eligible for Medicaid benefits, will instead be ineligible for Medicaid benefits for a period of time based on the value of the assets transferred within the sixty-month lookback period. Because of this lookback rule, the importance of planning for Medicaid eligibility well before the client anticipates a need for Medicaid benefits cannot be overstated. This is especially true where the client has non-exempt assets with sentimental value, such as multigenerational family land (other than their home, as discussed below), which would otherwise have to be sold to cover the private pay costs while the client is ineligible for Medicaid.
Even if the client is expected to need to qualify for Medicaid benefits within sixty months, there are still planning opportunities available to assist the client in qualifying for Medicaid benefits. These opportunities include spending countable assets (i.e. consuming them via spending on travel, entertainment, medical expenses, etc.), converting countable assets into noncountable assets (such as by investing otherwise countable liquid funds into the client’s home), transferring assets of the client to their spouse via the community spouse resource allowance (assuming the spouse will not need to currently qualify for Medicaid benefits), and utilizing a qualified income trust (also known as a Miller trust).
Medicaid Estate Recovery
Medicaid has always been intended to be “the payer of last resort,” and excess resources of Medicaid beneficiaries saved by virtue of Medicaid funds are meant to be tracked and recovered.[14] The Omnibus Budget Reconciliation Act, passed in 1993, requires each state’s Division of Medicaid to seek to recover amounts paid for the benefit of Medicaid beneficiaries against all “assets included within the [beneficiary’s] estate, as defined for purposes of State probate law,” subject to certain conditions and restrictions.[15] The idea being that if the Medicaid beneficiary had any assets at their death, those assets should be used to repay Medicaid before passing to the beneficiary’s heirs. When the Mississippi legislature enacted its estate recovery provisions, which the governor signed into law effective July 1, 1994, it chose not to expand the definition of estate.[16] Thus, the Mississippi Division of Medicaid is generally limited to recovering from amounts included in the Medicaid beneficiary’s probate estate (as defined by Mississippi probate law).[17]
Clients have often heard about the Medicaid estate recovery process and are typically worried that “the government” is going to take their house. Fortunately, the 2011 Court of Appeals of Mississippi case of Estate of Darby v. Stinson was a landmark case for Mississippi, holding that homestead property passing to a decedent’s surviving spouse, children, or grandchildren passed outside of the decedent’s estate free from the decedent’s debts, including the Mississippi Division of Medicaid’s claims for estate recovery.[18] Homestead property, while subject to statutory rules, is generally the land and buildings Mississippi residents own and occupy as their primary residence which is subject to the statutory homestead exemption from seizure or sale.[19] Beyond the protection provided by Mississippi’s homestead exemption and the Darby case, the Mississippi Division of Medicaid’s ability to enforce the estate recovery plan only applies in certain situations and is subject to several restrictions, which practitioners can potentially utilize to further mitigate the assets subject to estate recovery.[20] See my recent articles for a discussion of many of the most important specifics and exemptions of the Medicaid estate recovery process in Mississippi or a summary of the Mississippi homestead protections and how they interact with the Darby case.[21]
Conclusion
Estate planning for clients which are expected to have estates subject to estate taxes can be very different from those who are not expected to be subject to estate taxes. Once it is determined that estate tax planning is no longer a concern, that does not necessarily mean that intentional, well-considered estate planning is not advisable. Rather, there are a number of planning considerations that are present in many, if not most, estate plans which have nothing to do with estate taxes. Once the conversation can move beyond being focused on estate tax minimization, practitioners can begin to focus on other options in the plan which might be of lesser priority for a client that is expected to be subject to estate taxes. The items discussed in this writing are only a handful of those that practitioners should consider when discussing and creating estate plans for clients. Certainly, estate planners should evaluate the specific needs of the client in question, but a good list of items to consider can reduce the likelihood that a significant facet is overlooked. Several of the items discussed herein are time sensitive, such that if the practitioner fails to address them with a client in a timely manner, they could end up costing the client significantly.
[1] Revenue Procedure 2023-34. The exemption is expected to be indexed for inflation to $13.99 million in 2025 ($27.98 million for a married couple).
[2] Charles Allen, “Estate Planning for Nontaxable Estates” (August 28, 2018), https://esapllc.com/estate-planning-for-nontaxable-estates/.
[3] Internal Revenue Code 1014(e).
[4] Josh Sage, “ETA 2026 – Switching from Inclusion to Exclusion Planning for the Estate Tax” (February 15, 2024), https://esapllc.com/estate-planning-post-sunset-2024/.
[5] Miss. Code Ann. § 81-14-363.
[6] Miss. Code Ann. § 81-14-359.
[7] See the Mississippi Real Property Transfer-On-Death Act as set forth in Miss. Code Ann. §§ 91-27-1 through 91-27-37. Additionally, it should be noted that title issues may exist where a transfer on death deed is used if creditors notices are not provided.
[8] Miss. Code Ann. § 87-3-7.
[9] See the Uniform Durable Power of Attorney Act as set forth in Miss. Code Ann. §§ 87‑3-101 through 87-3-11 and the Uniform Health-Care Decisions Act as set forth in Miss. Code Ann. §§ 41-41-201 through 41-41-229.
[10] https://www.medicaidplanningassistance.org/penalty-period-divisor/.
[11] Many of the eligibility requirements are summarized at https://medicaid.ms.gov/resources/ under the “Eligibility Guidelines” links.
[12] https://medicaid.ms.gov/medicaid-coverage/who-qualifies-for-coverage/aged-blind-or-disabled-living-in-nursing-homes/.
[13] 42 U.S.C. § 1396p(c)(1)(B).
[14] Idaho Dept. Of Health & Welfare v. McCormick, 153 Idaho 468, 283 P.3d 785 (2012).
[15] 42 U.S.C. §§ 1396p(b)(1) & 1396p(b)(4)(A).
[16] Miss. Code Ann. § 43-13-317.
[17] Note certain exceptions may apply.
[18] Estate of Darby v. Stinson, 2011 WL 590868 (Miss. Ct. App. 2011). See also Mississippi AGO No. 2015-304 (Dec. 23, 2015) affirming that Medicaid will not have a recovery claim against homestead property owned by the Medicaid beneficiary at his/her death, and such property will descend to the beneficiary’s surviving spouse, children, or grandchildren.
[19] Miss. Code Ann. § 85-3-21.
[20] Id.
[21] Devin Mills, “Mississippi Medicaid Estate Recovery” (October 11, 2023), https://esapllc.com/mississippi-medicaid-estate-recovery-2023/ and “Mississippi Medicaid Estate Recovery and Homestead Protection” (November 17, 2023), https://esapllc.com/mississippi-medicaid-estate-recovery-and-homestead-protection-2023/.
