Planning Opportunities in a Down Market, 10-30-2008

Economic times have been hard. Asset values are down. But, now may be the best time to take action for a better future for you and your family.

Some tax and estate planning strategies are more effective now than ever before. Let’s look at two examples to see how planning in a down economy may offer unique opportunities.

John and Mary Smith earn $80,000 a year and have managed to sock away significant sums into their Individual Retirement Accounts (IRAs). However, in a down stock market, their IRAs have dropped in value by 1/3 from $300,000 to $200,000. The Smiths can convert their IRAs to Roth IRAs. Upon conversion, they pay income tax on the balance—the lower current value—of their IRAs. Once converted, their now-Roth IRAs will continue to grow completely tax-free. When the assets in their account grow in value, they will still be completely tax-free. Even if the assets double, triple, or skyrocket in value, they will still be tax-free. Unlike with a traditional IRA, John and Mary will never be forced to take a distribution. If they choose to withdraw money, their entire withdrawal will be tax-free. John and Mary can take advantage of this strategy because in the year of conversion they earn under $100,000 per year.

There are opportunities for wealthier families, as well. Through hard work and good fortune, Bob and Karen Jones built a business that would be subject to estate taxation upon their deaths. They have been thinking of implementing several estate planning strategies to diminish their taxable estate by transferring shares in the business for the benefit of their family. Now, with diminished asset values, they can get a larger portion of their business out of their taxable estate by gifting it to an irrevocable trust. Then, when the asset values increase in the future, the then-increased value will not be subject to estate taxation.

Whether your situation is closer to the Smiths or the Joneses, there are opportunities to take advantage of today’s environment. An appointment with a qualified estate planning attorney from Morris Hall can help you implement these and other tax and estate planning strategies to achieve your goals.