We Care

Economy presents opportunities for estate planning, P.1

According to estate planning experts, now is an excellent time to do estate planning. One should probably expect an estate planning to say that, but according to a recent Wall Street Journal article, various factors affecting estate planning strategies are working in the favor of families at present.

Those include low interest rates, increased individual federal gift-tax exemption from $1 million to $5 million, as well as market volatility, which could be beneficial for wealthy families wanting to leave assets to their children while sheltering assets from taxes. Here we will look at several ways families can take advantage the current economic climate in order to enhance their estate planning.

The first suggestion is that the shaky state of the stock market gives individuals with stock in privately held companies incentive to give it away. When an individual gives privately held stock away, the IRS usually gives between a 30 to 35 percent discount, since it is usually harder to find a buyer. But a volatile publicly traded market means that private stock owners have reason to ask for greater discounts on the value of their holdings.

In terms of how market volatility is measured, the Chicago Board Options Exchange Volatility Index is one tool used. It measures the projected volatility of the S&P 500 over the course of the next 30 days. While the volatility index sits below 20 in average times, it has significantly increased at various points in the recession, especially in the fall of 2008 and again in May 2010. In the present climate, when the volatility index is over 40, it would not, according to some experts, be unreasonable for a private stock owner to ask for discounts in the range of 40 to 50 percent.

Because of the increased gift tax exemption and the larger discounts on privately held stock, now is a good time to make gifts of private stock.

We’ll look at two other current incentives for estate planning in our next post.

Source: Wall Street Journal, “How Volatility Eases Estate Planning,” Kelly Greene, August 20, 2011.