When the market swings low, individual investment portfolios may decline significantly. Individuals who thought they had more than enough assets to fund their own retirement and leave significant bequests to heirs may then wonder if that is still possible. During low market cycles evaluate your estate plans, considering the following:
Take another look at your plans for distributing your estate. Your estate plan may distribute specific assets to specific heirs, such as a business to one child and investments to another child. While those assets may have been equal in value in the past, declines in your investment portfolio may make that distribution unequal. You may want to place provisions in your estate plan to equalize distributions.
Review amounts being placed in different trusts. Many estate planning documents indicate that trusts should be funded with assets equal to the unified applicable exclusion amount or the generation-skipping transfer tax exemption amount. Lower asset values coupled with significantly increasing exemption amounts could result in placing too large a percentage of your estate into trusts.
Use lower asset values to leverage your lifetime gifting strategies. You can gift up to $14,000, or $28,000 in 2016 (unchanged from 2015) if the gift is split with your spouse to any individual free of federal gift taxes. For 2016, you may also utilize a lifetime gift tax exemption of up to $5.45 million without paying gift taxes (up from $5.43 million in 2015). When your investments' values are low, you might want to gift some of those assets to your heirs. There are other strategies to leverage gifts, such as setting up trusts that discount the value of the gift and using family limited partnerships or limited liability companies.
Consider converting traditional individual retirement accounts (IRAs) to Roth IRAs. Regardless of the amount of your income, you may now convert a traditional IRA to a Roth. (See right-hand box for an important change regarding the income limit). Amounts rolled over from a qualified pension plan, such as a 401(k) plan, to a traditional IRA can also be converted to a Roth IRA.
Transferred amounts must be included in income if they would be taxable when withdrawn (e.g., contributions and earnings in traditional IRAs and earnings in nondeductible IRAs), but are exempt from the 10 percent federal income tax penalty. While there are many factors to consider before converting, a major factor is the ability to pay the income taxes with funds outside the IRA. With lower investment values, your tax bill will be lower also. Once the IRA is converted to a Roth IRA, qualified distributions, whether taken by you or your heirs, will be received on a tax-free basis.
Contact your financial adviser if you'd like to review your estate plan in light of recent market declines.