Stock market volatility is unnerving because the drastic and dramatic changes in value from one day to the next creates uncertainty about the future. When talking about ways to lessen the impact of market volatility, diversification of your assets over several different types of assets is a popular route to ensure the impact on the whole portfolio is less for any one type of asset decline. This diversification is the job of the financial advisor or portfolio manager.
In addition to the type of assets held, the structure of an Estate Plan can also create unwanted and unanticipated results if not done properly. Take the following examples.
John and Barbara have two children. They each have an IRA of roughly equal value and instead of worrying about splitting both accounts between their children, John leaves his account to one child, and Barbara leaves her account to the other child. Seems like an equal distribution, right? It may now, but what happens if John and Barbara have different investments, and by the time they both pass away the accounts are substantially different? The answer is that the children are left unequal distributions which is not what John and Barbara wanted to happen.
Jack and Cindy have one child and have a combined net worth of about two million dollars. In their estate plan, they want to leave two hundred thousand dollars to their local church as a charitable gift with the remainder going to their daughter. Over the next 25 years, Jack and Cindy substantially increase their net worth, and upon their deaths, they have close to ten million dollars. Because their estate plan left a specific dollar amount to the church, that gift will not change. As a result, the gift to the church decreased relative to their net worth from 10% to 2%. The converse of this problem can also be true, if their net worth decreased to five hundred thousand as a result of medical expenses, the gift to the church would end up comprising 40% of their total distributions!
To avoid these types of unwanted situations, provide the estate planning attorney as much information as possible about current assets and intent for distribution. It may be that you intend your children to receive different beneficial interests, or that you only want a fixed dollar amount to go to charity, but there are ways to draft these provisions to ensure your exact wishes are carried out.
