Why Market Turmoil May Cause You To Change Your Plan
If you were invested in the market, or own a piece of real estate, you were probably affected by the turmoil created by the corruption, greed and unaccountability in our country, and the financial havoc that has reared its ugly head in recent years. On top of that, tax and estate laws have changed dramatically. The problem lies in the fact that most estates have decreased, while some tax-advantaged regulations have increased. For example, in 2008 taxpayers were allowed to gift or leave $2 million in assets to their heirs without incurring any federal estate tax liability. In 2009, that amount changed to $3.5 million. This means that instead of $4 million, a married couple may now leave up to $7 million to their heirs. This is a huge difference and could leave the best thought-out estate plan in a precarious position.
Most married couples, who have a large estate, are advised to divide assets into separate trusts so that each of them can take advantage of the full gift tax exclusion. Likewise, beneficiary designations may have been strategically placed on certain retirement, annuity or life insurance accounts to also take into account maximum use of the allowable exclusion. Some of these accounts that may have been set up for income for a certain person, such as a disabled or spend-thrift beneficiary, may be way out-of-whack due to as much as 40-50% market declines. Therefore, future income for that individual may have dropped in half from previous projections.
The original intent of your various estate planning decisions may have included gifting your assets to your children on an equal basis. Upon close evaluation of your existing portfolio, you may be shocked to find that some of the assets bequeathed to certain children may no longer be equal. While one investment account or piece of real estate may have declined by 20% in the last twelve months, others may have dropped by as much as 80%, as in the case of some financial (bank) stocks. This situation could reverse itself as economic conditions continue to unfold, but it may take a very long time and could get worse before it gets better.
Part of the strategy should include re-evaluating the value of each individual asset and rebalancing the ownership of those resources. Income projections will have to be recalculated in order to determine if some growth assets should be changed to fixed-income assets in order to provide a certain standard of living to specific members of your family. Life insurance can be re-evaluated or purchased to creatively equalize wealth sharing. You may want to consider gifting based on a more qualitative criteria, or need, as opposed to equal distribution. Beneficiary designations will have to be taken into consideration as most retirement accounts allow for stretch options that may not last as long as planned due to decreased values. How accounts are taxed at distribution should be a key factor in any changes in apportionment. Ownership of assets may have to be changed from one spouses trust to the other's trust in order to utilize the $3.5 million tax exemption for each.
Current wills, trusts and other estate planning documents should always be reviewed and, in a lot of cases, revised in order to take advantage of new tax legislation and account for dramatic stock market declines and real estate devaluations. It has never been a more important time to coordinate all of your advisors including your financial advisor, estate planning attorney and tax specialist, to put new strategies in place to achieve your goals and take care of your family while keeping the Internal Revenue Service (IRS) and probate attorneys out of your pocket. Having regular annual meetings with all of these important advisors together will result in you being prepared for anything the changing economic and investing environment can whip up and the reward should be that all issues are brought up for consideration and hopefully solved.
Robin S. Davis is a Certified Financial Planner™, a member of the Financial Planning Association, and is the owner of Davis Wealth Enhancement Group, Inc., in Stuart, Florida. She has been advising retirees since 1984 and has held over 500 public seminars on financial issues. She is the author of the book Who's Sitting On Your Nest Egg? Why You Need a Financial Advisor and Ten Easy Tests for Finding the Best One. Davis expresses the importance of utilizing a competent financial advisor. For more information, please call (800) 896-5422 or (772) 463-4441, visit www.robindaviscfp.com
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