I write this as the stock markets brace for the reaction to Lehman Brothers filing for Chapter 11 bankruptcy and Bank of America’s purchase of Merrill Lynch. I’ll leave the financial analysis and what you should do, if anything, to your portfolio to your financial advisor. Today I’m going to write about how these turbulent markets affect your estate planning.

The most common reaction I’ve noticed during bear markets and financial turmoil is for people to put their estate planning on hold. It’s difficult to discuss putting your estate plan into place, or keeping it up to date when you are not sure what your real property is worth while your stock and bond portfolio falls.

You should not let fear paralyze you, however. Now is the time to take prudent steps to shore up your legal and financial health. Meet with your financial advisor to discuss if you have more exposure than might be necessary to certain elements of the economy. You may think that your financial advisor is on top of things and will call you if you need to act, and they just might. Most financial advisors, however, have many clients and may not take the time to review your individual situation without some prompting on your part.

As for your estate strategies, keep in mind that many complex estate planning strategies such as Grantor Retained Annuity Trusts, transfers of family limited partnership interests and Qualified Personal Residence Trusts are affected by downward pressure on values. Where you have already embarked on one of these strategies it may make sense to review where you are and what, if anything should be done given the drop in values.

On the other hand, those same estate planning strategies work best when you make the transfer during the time of lowest valuations. Economic downturns happen cyclically. At some time the economy rebounds, and prices begin to move upward. If estate taxes may affect your estate, making transfers into advanced estate planning strategies while the market is at its lowest makes the most sense.

This is best illustrated by an example. Assume that you have a residence that you would like to transfer to the next generation. Your attorney recommends a qualified personal residence trust (QPRT). Assume further that three years ago the residence was valued at $2.5 million. If you had placed the home in a 10 year QPRT in June, 2005 and when you were 68 years old the taxable gift would have been $1.1 million. This means that the transfer would have consumed your entire gift tax credit and that you would have actually paid around $40,000 of gift tax to effectuate the transfer.

Assume that you decided not to make the transfer in 2005. Today you meet with your attorney who again suggests a QPRT for the residence. You get an appraisal on the residence and it comes in at $1.8 million. You are understandably upset that your residence has lost so much value. But let’s look at the good news from an estate planning perspective. The taxable gift on a 10 year QPRT (you are now 70) would fall from $1.1 million in 2005 to $787,000 today.  If the home were to appreciate in 10 years to $2.6 million (assuming a 4% growth rate) you would have saved potentially almost $1 million in transfer tax within your estate.

So don’t let fear paralyze you from meeting with your estate planning attorney to determine whether the drop in the markets and in real estate values actually marks an opportunity for you and for your family to save taxes.

©2008 Craig R. Hersch .Learn more at www.sbshlaw.com