By Raymond D. Mignone, CFP
Due to the market declines over the past few years, now may be a good time to review your estate-planning strategies. You want to ensure that the plans you made a few years ago still make sense in light of lower-equity portfolios and the higher real estate values here in Queens.
How was your plan set up initially? Did your estate plans specify certain assets to specific heirs? If so, you need to revalue the assets. Say, for example, three years ago both your home and your stock portfolio were worth $300,000 each and you specified in your will that you want to leave your stock portfolio to your son and your house to your daughter.
Three years later, your stock portfolio may be worth $150,000 and your home $600,000! Your son may feel you purposely slighted him when the estate is settled. If your intent is to leave each child an equal inheritance, then this needs to be updated and balanced.
You may want to place provisions in your estate plan to equalize distributions. A common estate-planning technique is to set up a will with a by-pass trust that gets funded upon the first death.
Many older estate-planning documents indicate that trusts should be funded with assets equal to the unified applicable exclusion amount or the generation-skipping transfer tax exemptions amount. Lower asset values coupled with significantly increasing exemption amounts could result in placing too large a percentage of your estate into trusts.
Another idea would be to utilize the current gifting exclusion amount (currently $11,000) by gifting some of your stocks that may have dropped in price. If these are investments that you want held for the long term, take advantage of current low prices and give more shares for the $11,000 gift. Don’t forget both husband and wife can each gift $11,000 of assets.
Another estate-planning strategy I have been using recently with clients who have charitable intentions is setting up a charitable remainder trust (CRUTs/CRATs). Without getting too complicated, these trusts are a great way to diversify highly appreciated assets, avoiding capital gains taxes and providing a stream of income to you while you are alive.
Highly appreciated assets are often contributed to charitable trusts in order to eliminate potential capital gains taxes that will become due when the asset it sold. For example, rental properties having a current fair market value of $1 million and a cost basis of $50,000 are contributed to a charitable trust. When the properties are subsequently sold, the capital gain tax of some $266,000 has been avoided inside the charitable trust, leaving more proceeds available to generate the income necessary to pay the life or term beneficiary (you).
A widow who had a very large portfolio of individual stocks, mostly bought some 30 years ago at much lower prices, came to me. She wanted to reduce the risk of her portfolio. She had no bonds, no children and wants to leave her estate to charity when she passes but needed to ensure the portfolio would last her lifetime.
By establishing a charitable remainder trust we were able to put the stocks in the trust, sell them without paying capital gains taxes, diversify into bonds and provide her with a stream of income for life.
With recent large changes in property and portfolio valuations, now may be an excellent time to review and update your existing estate-planning strategy.
Raymond D. Mignone is a fee-only Certified Financial Planner & President of Ray Mignone & Co. Inc. He specializes in retirement planning and investment management; he can be reached in Little Neck at 718-229-2514, or visit www.RayMignone.com.
