How to fix it…
If your portfolio took a pounding in 2008, your estate plan probably needs some attention. You might have to make adjustments to limit the impact that the losses have on you and your heirs. Pay attention to…
YOUR WILL
Does your will still leave your spouse with enough assets to live on comfortably? If the value of your estate has declined precipitously, this could be in doubt. If so, it is probably wise to leave more to your spouse and cut back the amount bequeathed to other heirs or charities.
If your will includes specific bequests of assets to beneficiaries, make sure that the assumptions you made about the value of these assets are still valid.
Example: You left your home to your son and your stock portfolio to your daughter. When the will was written, these were roughly equal in value. If your stock portfolio has lost 40% of its value since then, but your home’s value is down just 10%, you might need to leave your daughter additional assets to keep the gifts equal.
GIFTS AND LOANS
Did it seem that just a few years ago you had more than enough money to finance your retirement? If so, perhaps you have been taking advantage of the federal government’s gift tax exclusion, your right to make annual gifts of up to $12,000 a year to each of your children or grandchildren or other recipients without triggering gift tax. (The tax-free amount will increase to $13,000 in 2009.) These gifts are a great way to reduce future estate taxes — they remove money from your estate. But if your net worth has declined sharply in the past year, it’s time to reevaluate your financial position and make sure that you can still afford such generosity.
If there is any chance that you or your spouse could outlive your now-depleted savings, it might be wise to reduce, suspend or discontinue these gifts. Inform your heirs of this as soon as possible so that they can adjust their own savings and spending plans accordingly.
Hard hit: If this horrible economy has left one of your family members in a particularly difficult financial predicament, consider continuing your annual gifts only to this person. Helping a loved one through tough times may be more important than keeping your gifts to your heirs exactly even. You can balance the gifts out later, after this descendant is back on his/her feet. Or, you can adjust your will to give less to the family member you are now helping out financially.
If you lend money to a family member, put the terms of the loan in writing. This can help prevent the IRS from treating the loan as a gift. It can also protect the money if the loan recipient is sued or divorces.
TRUSTS
If you are the beneficiary of a trust, ask the trustees how the market correction will affect future distributions. Reevaluate your spending and saving plans accordingly.
If you are the trustee of a trust that has lost a significant portion of its value, contact an estate-planning attorney before speaking with the trust’s beneficiaries or taking any other actions.
Reason: You could be personally liable for some portion of the losses if you don’t comply with the terms of the trust and the Uniform Prudent Investor Act.
FOR BUSINESS OWNERS
For those in the process of passing a business to their heirs, this bad economy could actually be a golden opportunity.
What to do: Have the business reappraised. Most businesses are worth substantially less in recessionary economies, at least on paper. That means you might be able to pass your heirs a larger percentage of the business each year without gift tax being imposed.
In fact, you can give your heirs an even larger percentage of your business each year than the $12,000/$13,000 gift tax exclusion limit suggests. Because the gifted portion of your business is illiquid and does not give the recipients any control over business decisions, the IRS will allow you to “discount” its value for tax purposes. Larger discounts may be acceptable in tough economic times like these. Discount calculations can be complex, so consult an estate-planning attorney or CPA.
INSURANCE
You should think twice before canceling insurance policies even if you are desperate to trim your costs. Living without health, disability, life, business, homeowner’s or automobile insurance is an unacceptable risk that could cost you all of your savings. Consider increasing the size of your policy deductibles and removing nonessential riders to reduce costs instead.
It is reasonable to cancel insurance policies only if the reason you purchased the coverage in the first place no longer applies.
Example: It might be OK to cancel (or cash out or sell) life insurance or disability coverage if you have retired and no longer depend on this insurance to replace lost income in an emergency.
Even large, well-regarded insurance companies can face problems in this economy. Ask a financial adviser or trustworthy independent insurance agent about the financial health of your insurance providers and your options if these companies are at risk. It might be possible to switch your coverage to a more financially secure company. This can be done tax free through what is known as a Section 1035 Exchange. Consult your tax adviser.
