Brown & Associates - Attorneys & Counselors at Law, P.L.L.C.

ESTATE PLANNING AND THE STOCK MARKET
(9/22/02)

Recently, I addressed the effect of the 2001 changes to the Internal Revenue Code on many people's estate plans. One factor I haven't discussed is how the Bearish Stock Market has affected these plans, as well.

Between 1990-2000, there was unprecedented growth in the market which led many to predict baby boomers would inherit trillions of dollars from their parents and others. Then came 2000. According to one report I read, equity investments have lost almost $8 trillion dollars since March 2000.

No More Free Lunch

When parents saw their investments shrink, they began rethinking their charitable tendencies. Ask almost any charity and you will learn that donations are down. Some of this may be because funds were diverted from favorite charities to the victims of September 11th, but stock market losses have also had a profound effect on gifts to charities-and to families. Many of those who were generous with gifts to their children have cut the flow to a trickle-or shut it off altogether.

Reasons for Caution

There are several reasons for this decrease in family gifts. For one thing, many retirees are freely spending their children's inheritance on travel, medical care and the good life. Their expenses have increased while their financial resources have shrunken. They are justifiably concerned that they won't have enough left to carry them through their golden years, so for now they are holding on to what they have.

Another problem is that parents have seen the values of their assets change dramatically-mostly downward. One acquaintance was contributing funds to six separate investment accounts, each of which she jointly owns with a different child. Some accounts have fallen in value more drastically than others. Others have increased in value. If the accounts were in her name only, she could move the assets freely from one account to the other to keep them equalized. Unfortunately, not all of her children will agree to a transfer of assets.

She would like to make larger gifts to those whose accounts have suffered the most, but can't because she no longer has enough cash to freely give it away and she doesn't know when or if the market will recover and change the picture again.

Another reason for the decrease in gifting is the longer life expectancy of our parents. Men are now expected to live 18 years after retirement, instead of only 12 years in 1950. Women are expected to live 22 years after retirement, up from 14 years in 1950.

Finally, there has been a shift in thinking. Where parents used to think it was important to leave an estate for their children, now less than half consider this important.

The Incredible Shrinking Inheritance

According to one economist, the current market downturn could reduce baby boomer's inheritances by $30 billion per year, from $180 billion to $150 billion, over the next five years. Today, the focus is on preserving what you have. Parents are less worried about reducing taxes or leaving something for posterity and more about having enough left to meet their retirement needs.

The client with six accounts has gone so far as to remove money from each and put it in a new account in her name only. Saving taxes on the kids' inheritance has taken a back seat to meeting her own needs.

What can I do to "Fix" my Estate Plan?

Understand that joint accounts and joint tenancies with anyone other than your spouse may not be a good idea. If you slice your estate into separate segments, you risk giving one child or beneficiary too much and another too little. If you are a joint account holder and have full withdrawal rights, you might consider closing the account and opening a new one in your name only. Then you can establish a trust to hold the assets and make sure your children receive equal shares.

If you want to give someone specific property, you can do it within your trust. Just make sure there are enough assets to equalize the value of distributions if that is your intent. For example, if you give one child a china collection worth $2,000 and another a gun collection worth $20,000, you can specify that the former will be made whole through a larger cash payment from the estate.

If you own real estate in joint tenancy, the situation is more complicated. You cannot transfer land unless your joint tenant agrees and signs the necessary forms. I've had experience with recalcitrant joint tenants. If this happens, equalizing your estate through larger distributions to other beneficiaries may be your only alternative.

What if I want to Sell my investments?

You may be able to do this, but you will probably need the consent of your child or other beneficiary if he or she is a joint owner.

If you are worried about capital gains taxes, you might consider setting up a private annuity trust. You transfer your investments to a trust and then have the trust sell them. The trust, in turn, pays you a guaranteed yearly income. This allows you to spread out your capital gains taxes over your lifetime.

This is a brief overview of the effect the downturn of the stock market may have had on your estate plan. If you have questions, be sure to consult with an estate planning professional who can analyze your particular situation and advise you of the alternatives available to you.

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