Articles
Client Alert - Has the Recent Market Collapse Affected Your Estate Plan?
By Robert J. Giordanella
Jun. 29, 2009
When was the last time you reviewed your will and estate plan? Do you know what the market collapse has done to your estate plan? You probably schedule regular doctor’s appointments to monitor your health and periodically bring your car to a mechanic to keep it running safely. But is reviewing your will on your list of things to check from time to time? Most likely it is not. If you have not done so recently, you may be surprised to learn that the plan you previously worked so hard to devise may have changed dramatically. What would cause this change?
First, like many other individuals, you have likely experienced a decrease in your net worth over the past year or so. Real estate, stocks and retirement accounts have diminished in value. Specific bequests to friends, charities and others beneficiaries, which may not have materially impacted your residuary estate when you originally drafted your will, may now substantially reduce the value of your residuary estate passing to your primary beneficiaries.
The increase in the amount exempt from federal taxation, commonly referred to as the Unified Credit or Exemption Amount, may also impact your testamentary objectives. In just 7 years, the Exemption Amount increased from $675,000 to $3.5 million. While the increase in the Exemption Amount shelters more of your estate from taxation, which certainly benefits your beneficiaries, the increase, when combined with the diminution in your net worth, may significantly alter how your estate passes to your beneficiaries, especially if you are married.
Many married couples, in an effort to minimize their estate tax liability, established testamentary trusts for the benefit of their surviving spouse. Typically, the amount transferred to the trust was based on a formula tied to the Exemption Amount. After the funding of this trust, the balance of the deceased spouse’s estate would pass to the surviving spouse outright.
This plan may have been satisfactory when it was established years ago, but is that still the case? Most likely, the answer is no. Why is that? Let’s assume your combined estates, consisting of a principal residence, retirement accounts and liquid assets, are currently valued at $4 million (down from $5 million a few years ago). Your will, created when the Exemption Amount was $675,000, contains a clause which bequeaths an amount equal to the Exemption Amount to a trust for your spouse’s benefit, $200,000 to charities and the balance of your estate to your spouse. At the time you executed your will, this plan would have resulted in $675,000 being placed into trust, $200,000 being paid to charities and the balance of the estate ($4.125 million) passing outright to the surviving spouse. Even with the anticipated graduated increase in the Exemption Amount, you were comfortable with this plan because your spouse would still receive a significant share of your assets outright and there was an expectation that asset values would at least hold steady, if not rise, over time.
Fast forward to 2009. That very same plan now results in $3.5 million, nearly your entire estate, being placed into trust with just $300,000 passing outright to your surviving spouse (remember the decrease in net worth!). While the trust provides for income to be paid to the surviving spouse, not all of the trust is comprised of income producing assets and current interest and dividend rates are relatively low. Your trustee, not your spouse, has the power to sell trust assets to generate funds and only your trustee can invade principal for your spouse’s benefit. Even if your trustee is a child or close relative, you may feel quite differently about having so much of your net worth taken out of your spouse’s control and placed with a trustee.
An issue of even graver concern exists if you decided to bequeath the Exemption Amount to your children or other beneficiaries rather than to your spouse. You may have made that decision when the Exemption Amount was much lower and asset values were increasing, thinking the residuary estate passing to your spouse was more than sufficient to meet your spouse’s future needs. However, you may now find that all or a significant part of your estate will pass to your children, leaving little or no assets for your surviving spouse – a result you almost certainly did not intend.
The increase in the Exemption Amount does not just affect married couples. The Generation Skipping Transfer Tax Exemption Amount (“GST Exemption”), which is the amount that can be transferred to grandchildren and lower generations without the imposition of an additional estate tax, has also increased to $3.5 million. Therefore, a bequest of the GST Exemption to your grandchildren with the residuary passing to your children can have the unintended result of distributing all or a significant amount of your estate to your grandchildren rather than your children.
What this demonstrates is that devising an estate plan is not a one time event. Your work did not end when you executed your will. Current developments make it mandatory that you review your will and other related estate documents now to confirm that they still represent your intentions. Otherwise, the disposition of your estate may be much different than what you intended.
Members of our private client group are available to review your estate plan and assist you in revising your will and related documents so that they reflect your current intentions.
| Simon Gerson | sxg@cll.com | (212) 790-9206 |
| Robert J. Giordanella | rjg@cll.com | (212) 790-9234 |
| Robert Halper | rxh@cll.com | (212) 790-9260 |
| Peter R. Porcino | prp@cll.com | (212) 790-9208 |
| Morton L. Price | mlp@cll.com | (212) 790-9254 |