The Result of Market Change on Your Estate Plan

A new tax law isn’t the only reason to revisit your estate plan. Investment market changes and falling interest rates change the effects of many estate plans, often without their creators knowing the consequences. Here’s a guide to some the effects the changes of the last 18 months might have on your estate plan.

The values of many estates changed a lot the last couple of years, especially when a large portion of an estate is in stocks. That’s a a big problem if your will leaves specific dollar amounts to individuals or to charity.

Suppose your will leaves $50,000 to charity, which two years ago was no more than 10% of your $500,000 in liquid assets. But if you invested aggressively (not following our Retirement Watch recommended portfolios) your portfolio is down by 30% to $350,000. Now, the charity would get about 15% of your assets. More importantly, your survivors would get about $315,000, instead of the $450,000 you intended.

In a variation, suppose you have two IRAs at different fund companies. They had similar balances two years ago, so you named one child as beneficiary of one account, and the other child as beneficiary of the other IRA. But the funds in the IRA have very different investments and now there is a 20% difference in the values of the two accounts.

Market fluctuations are a good reason not to leave simple, specific bequests in your estate plan.

Instead of leaving specific dollar amounts, use an equation setting upper and lower limits on a bequest. For example: “Charity A gets $50,000 or 10% of my estate, whichever is less.” Instead of leaving specific accounts or assets to beneficiaries, leave them comparable values or percentages of your estate. Let the executor decide whether to give specific accounts to each beneficiary or to sell assets and distribute cash. Or let the heirs choose. Designate a specific asset only when there is something unique about it such as art, antiques, jewelry, heirlooms, a family business, or items of personal significance. In the example of the two IRAs, you could have named each child as equal co-beneficiary of each IRA.

• Market fluctuations after the estate is settled also can cause problems. Suppose some heirs get assets while others get cash. If the assets appreciate significantly, those who got cash will complain. But if the assets decline, those who got the assets will complain.  Everyone should be equally subject to asset fluctuations, or the executor should sell assets and distribute only cash.
• Deductions and valuations for strategies such as charitable trusts and qualified personal residence trusts vary with interest rates. Estate planning strategies that become more attractive after interest rates increase are charitable remainder annuity trusts and qualified personal residence trusts. If those were attractive options a year ago, they are less attractive now.But charitable lead annuity trusts are more attractive as rates decline. These trusts pay income to a charity for a period of years. Then the trust property either is returned to you or goes to your children. A grantor retained annuity trust also is more valuable with lower rates. In these trusts, you receive income for a period of years, then the trust property goes to your heirs. A private annuity is more valuable with lower interest rates. A private annuity is created when you sell property by giving it to your heirs in return for their agreeing to make fixed regular payments to you for the rest of your life. Charitable remainder unitrusts and grantor retained unitrusts generally are not affected by interest rate changes. In these trusts, the income beneficiary gets a fixed percentage of the trust’s value each year.

  If you considered various estate planning strategies a year or more ago and didn’t implement them, get an update on your options and take another look.

• Estate executors also should follow the markets. Generally assets in an estate are valued as of the date of death of the owner, and estate taxes are based on that value. But the law provides for an alternate valuation date of six months after the owner’s death. That’s something to keep in mind for the executor of anyone who died since the market peak in March 2000. Choosing the alternate valuation date could save a bundle in taxes.
• This also could be a good time to make low-interest or no-interest loans to family members.

Suppose you have money you don’t need now but expect to need in five or more years. You can identify investments that you think are selling at bargain levels. Your children or other loved ones would benefit greatly over time if they could buy those assets. Lend the loved ones money to buy the assets. The loans can be secured by the assets.

After the assets appreciate, your family members can sell them and pay you back. They might even be able to borrow against them to repay the loan.

The tax law says that if you don’t charge a market interest rate on the loan (as determined by tables issued by the IRS each month), then you’ll be considered to make a gift to the borrower of the amount of the interest that should have been charged. You’ll be taxed as though the borrower paid that amount of interest to you each year.

But a minimum interest rate is not required if the total loans you’ve made to the borrower are $10,000 or less. In addition, if the total loans to the borrower are less than $100,000, the implied interest deemed to be paid to you will not be more than the borrower’s net investment income for the year. And if the borrower has net investment income of less than $1,000, there is no deemed interest payment to you. But you’ll still be considered to have made a gift to the borrower of the interest that was not charged. There is no gift tax if the total implied interest for the year plus other gifts is less than $10,000.