Estate Plans Reeling from 'Volatility Fatigue'

Seniors shift focus from heirs to own needs, while the rich ponder uncertain future of estate tax rules.


Financial planners say their older clients with estate plans are, in a word, exhausted. After years of sudden swings in investment results and weakness in real estate markets, they are suffering from what one planning group calls "volatility fatigue." Toss in dramatic changes to estate taxes that could be changed on short notice, and it's no wonder that even affluent seniors are worn out in their efforts to conserve their wealth and figure out the best ways to convey it to their heirs.

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"I think a lot of my investment clients are coming into my office feeling kind of exhausted," says financial planner Mark Boddy in Richmond, Va. "Every day, there seems to be a 1 or 2 percent gain or decrease in their investment portfolio."

"Long-term, what's been challenging has just been the uncertainty of how their estates will be taxed," he says. "More than anything, I think people just want some clarity about what those long-term rules are going to be."

At the end of 2010, Congress approved a two-year makeover of estate taxes. It sharply increased the tax-free amounts that people can either pass on in their wills or give away as gifts —to $5 million for an individual and $10 million for a married couple. In 2013, this exemption would fall to $1 million and the tax rates on larger estate values would increase to 55 percent from today's 35 percent.

Even before then, some estate attorneys expect Congress to cut these exemptions as part of a deficit-reduction plan. "If the [Congressional] supercommittee can get anything done," says estate attorney Susan L. King, "there's a chance that they would reduce those deductions, effective the first of next year."

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King, who works near Syracuse, N.Y., and practices in several states, thinks it's unlikely that Congress would be able to move that quickly, but says some estate advisers are telling clients not to risk losing the exemption. "The big [estate] practices are using it as a push and urging clients to do their gifting now," she says. "It is giving those in the wealthy bracket a little bit of an impetus to say, 'Well, maybe we should do it this year.'"

For less wealthy individuals, the major event of the past few years has been the drop in the value of their investment portfolios and real estate holdings. "Many just have less money to leave," says Kevin Meehan, an adviser in Itasca, Ill., near Chicago. Flat or declining incomes, falling property values, and shrinking financial assets have inflicted a big hit on many estate valuations.

As a result, people's attitudes have shifted from thinking about how much money they can leave their children to whether they even have enough money for themselves. "Let's first make sure I have enough, and then we can think about what I may be leaving behind," Meehan says in describing the attitudes of some of his clients.

"It goes from 'How am I going to take care of my kids' to "How am I going to take care of myself?'" agrees Joel Redmond, a financial consultant in Syracuse with Wells Fargo Advisors. Coupled with these concerns, he adds, short-term uncertainties have raised pressure on people to depart from their longer-term financial plans. "They seem to have this focus on things they can't control," he notes, such as interest rates, the health of European economies, or U.S. deficits. Instead, Redmond advices, "You've got to focus on your own house."

[See How the Supercommittee Deficit Plan May Affect Seniors.]

Beyond volatility fatigue, declining estate assets, and possible changes in estate taxes, there also are ongoing estate issues that continue to draw advisers' attention.

"Some of my clients have made the decision to gift money while they are alive to help their kids purchase homes," says Rita Cheng, an adviser in Bethesda, Md. "My clients believe that interest rates are low and that [home] prices have stabilized," she explains. "Clients want to help their kids lock in affordable housing."

Christine Parker, a financial planner and president of Parker Financial in La Plata, Md., says many of her clients are widows, and their focus has always been on asset preservation and having resources to fund future healthcare needs. "Inheritance or charitable giving may be lower than expected in the future because home values remain depressed and annual expected rates of return on investments are lower," says Parker.

King says uncertainty and flat or reduced levels of financial assets prompt some people to avoid estate planning altogether. "In a down economy, they're not as likely to spend the money to speak with an attorney" about estate and end-of-life healthcare issues, she says. Even people with basic estate plans are more risk-adverse and more reluctant to use more sophisticated estate tools.

"They are afraid to do any of the more sophisticated estate planning, where you would be pulling assets out of their control and giving control of them to the next generation," King says. "They fear they might need that money themselves."

Twitter: @PhilMoeller