Rader and Coleman, P.L.

Estate Planning in this Depressed Economy
by Stuart A. Rader, Esq.
Rader & Coleman, Attorneys at Law
2101 NW Boca Raton Boulevard
Boca Raton , Florida 33431
561.368.0545

www.raderandcoleman.com

© October 2008

This article is not intended or written to be used as legal advice, and cannot be used, for the purpose of avoiding tax-related penalties.

The current economic situation is wake up call to review estate plans. The substantially reduced values of stock and bond portfolios may have unintended consequences that change the planned distribution scheme under one’s Will or Trust. I was quoted in the October 17^th edition of the Wall Street Journal[1], that clients need to “do the math” when reviewing their estate planning documents. This is especially important in documents that provide for specific dollar amounts or specific assets being distributed to different beneficiaries. Another potential issue is in this economy is providing current financial assistance to one family member without coordinating with the entire testamentary estate plan. In some cases, the result could be an unintended windfall or dis-proportionally greater distribution to one family member at the expense of others.

These issues are best illustrated by the following examples.

Specific Gifts Example. Joe is a widower. His wife died in January 2005. He has two children: Sam who is a doctor in California and is married with no children; and Sally who is, a real estate broker and a single mom with two young children. Joe has no liabilities. In October 2007, he executed his Will and Individual Retirement Account Beneficiary Form (“Estate Plan Documents”) when his net worth was $1,300,000. Joe wishes for there to be equal distribution to Sam and Sally. In October 2008 his net worth decreased to $900,000. His assets are shown below:

His Estate Plan Documents, at death, provide:

1. Individual Retirement Account (IRA) Beneficiary Designation Form to Sam if he survives, and if not, then to Sally;

2. Will:

a. Specific Gift of Homestead Residence to Sally; and

b. Residue 70% to Sally and 30% to Sam.

This results in equal distribution between Sam and Sally based upon October 2007 valuations:

When we do the math and distribute the estate based in accordance with the Estate Plan Documents based upon the October 2008 asset values, unequal distribution result:

The result is clearly not what Joe wants, which was to provide for equal distribution between his children. Because of the change in value of Joe’s assets in October 2008, Sally would receive assets worth $110,000 less than what Sam receives. The good news is that the remedy is easy. Joe can update his IRA Beneficiary Designation to pass equally between Sam and Sally, and his Will can be re-written to devise his homestead equally to Sam and Sally and to provide the residue passes equally to Sam and Sally.

Financial Assistance. Suppose that Joe decides that he wants to assist Sally and her children by giving Sally $50,000 in November 2008. Joe has several options, including:

• Giving a $50,000 gift outright to Sally without adjustment under his Last Will;
• Giving a $50,000 gift outright to Sally with adjustment under his Last Will, by making a specific devise to Sam of $50,000 or by providing that Sally’s residuary share is reduced by lifetime gifts made to her after October 2008; or
• Making a loan to Sally upon favorable terms with a below market interest rate.

Gift to Sally. If Joe gives a $50,000 gift to Sally without any adjustment under his Will, then at his death, Sam and Sally will receive the same 50% share. The net impact is Sally will receive $50,000 more than Sam because of the $50,000 lifetime transfer. In contrast, a Will adjustment will equalize the overall distributions to Sam and Sally.

Loan to Sally. If Joe extends a $50,000 loan to Sally evidenced by a written promissory note, then there is no need for an adjustment to the equal distribution under his Will. If the loan has not been paid at the time of his death, then his Estate will collect the note balance from Sally, prior to making any distribution to her. This means that any amount Sally owes evidenced by the note will reduce the net residuary share to Sally. Keep in mind that Joe cannot extend an interest free loan to Sally, otherwise the loan will be re-cast as a gift loan by the IRS and income will be imputed to Joe for the interest element of the payments. Fortunately, there is a safe harbor for loans between related parties. The Applicable Federal Rate (“AFR”) is an interest rate published monthly by the IRS to avoid gift loan treatment of below market loans between related parties. Currently, the rates for November 2008 loans paid annually are:

Therefore, Joe has the option of funding and preparing a note to Sally for $50,000 for a 3 year duration, with interest payable annually at the rate of 1.63% ($815 per year interest expense), and the principal due at the end of the term.

It is important to analyze your estate planning documents based on your current financial information to determine whether the documents still fulfill your original intent. If they do not, then please call the office for an appointment to review your documents. If you wish to provide financial assistance to a family member in need, there are gifting or loan options available. The option selected will require a balance between the desire to presently assist the family member and the intent to maintain the overall estate plan at death.