“How Asset Price Swings Affect Estate Planning”

Published in the Hokubei Mainichi, Mar. 28, 2009
by LAURIE SHIGEKUNI

For readers of the Hokubei who have lost money in the stock market, I feel your pain. Many of us are in the same boat together.

Given the recent changes in stock market and real estate values, you may wish to look back over any specific gift provisions you may have included in your will or trust.

Since 2007, assets have been changing value rapidly compared to each other, and compared to the value of cash. If you wrote a will or trust several years ago, and it leaves specified amounts of stock, real estate, or cash to various beneficiaries, the balance among the gifts may no longer be what you intended.

Here are some common types of gifts that may affect you:

Different Gifts, Different People

Your will or trust may give different types of gifts to different people. You may have written your will and trust to give the best gifts to the people who were closest to you. With the fall of the stock market, it’s important to revisit who gets what.

Consider this example:

"I give my favorite niece, Amy X. Suzuki, all of my Bank of America stock. My bank account at Bank of America shall be divided into equal shares and distributed to my friends Alice Y. Nakamura and Setz Z. Oda."

When the will or trust was drafted 10 years ago, let’s say your Bank of America stock was worth $200,000 and the Bank of America bank account was worth $50,000.

In April 1999, the price of Bank of America Corporation stock was about $35 per share. Toward the beginning of the past year, prices for the same stock sometimes exceeded $35 per share, but recently the prices have been much lower — at their worst, only $2.53 per share.

So, depending what day Amy inherited the stock, the value she received might have been above $200,000, or it could have been as low as $14,457.

Meanwhile, if your $50,000 bank account has been growing at 3 percent annual interest, it’s now worth more than $67,000. So your gift clause now would have given a fairly reliable amount to Alice and Sets, about $33,500 each.

You probably wouldn’t have chosen to place the gift for Amy at the mercy of a floundering stock market while delivering a more reliable gift to your friends, so in light of current events you might want to make some changes.

Here’s another example:

"I give my home located in San Francisco to my daughter, Nancy X. Wong. I give the remainder of my assets, which consist of stocks and bank accounts, to my son, Taro Y. Tamura."

Perhaps the San Francisco home and the remainder of the estate had approximately equivalent values 10 years ago, and you wished to give approximately the same value to your son and your daughter.

Now, although the home may have slipped from its peak value, it is probably still worth more than the stocks and savings. Is that fair to Taro?

Small Gifts May Now Be Large

Your will or trust may direct that nominal (small) gifts be given before the rest of the estate is split up. You may have wanted these people to receive only token amounts compared to your main beneficiaries.

As time passes, however, gifts intended to be nominal may become too large a proportion of your estate.

For example, sometimes people want to give smaller amounts to their grandchildren, while leaving more generous gifts to their children.

Here is an example:

"I give $5,000 to each of my grandchildren. I give my General Motors stock to my two children."

The cash may now be the more generous gift.

Large Cash Gifts May Become Impossible

As people age, they may find themselves with a valuable house but limited cash savings.

If your will or trust gives a specified amount of cash to a beneficiary, you might consider the possibility that there won’t be enough in your bank accounts for the payment.

In that case, you might want to consider if things like your house should be sold to make up the difference, or if the cash gift should be reduced or expressed more flexibly.

For Flexibility, Give Percentages of Your Estate

Instead of giving your assets by categories or defined monetary amounts, you may wish to put provisions in a will or trust that give specified percentages of your estate to beneficiaries.

For example, your favorite niece might appreciate 20 percent of your estate more than your Bank of America stock. Exceptions may be family heirlooms such as jewelry or antiques, or your house, if you would like it to be kept in the family.

The important thing is to take out your documents and look at them. Your “distribution clauses” (the gift provisions) may be easy to spot if they are full of the personal names of your friends and relatives.

If you can’t find your distribution clauses, you might want to ask a lawyer. It’s easy to avoid looking at or thinking about these things but sometimes it is important to do so.