Estate Growth and Shrinkage

When a person’s assets accumulate over time, one can expect to see those assets grow as they age.  However, after death, a large chunk of those same assets can end up being eaten away by government taxes, fees, and other administrative costs.  This decrease can be a significant portion of a person’s estate and is called estate shrinkage.  For those who are concerned that this shrinkage may not leave their loved ones with enough and want to leave more of their estate to their beneficiaries, there are some steps that can be taken to protect those assets.

Reasons for Estate Shrinkage

With the many different groups, ready to take a piece of your estate “pie,” it is wise to know exactly where to expect this shrinkage when planning for the future.  Smart estate planning involves knowing the particular shrinkage areas and being proactive pertaining to these areas.  Some of the estate shrinkage areas include:

  • Final expenses
  • Probate costs
  • Estate taxes
  • Illness expenses not covered by insurance
  • Medicaid recovery
  • Funeral and burial expenses
  • Debts and liabilities such as mortgage, car loan, and credit cards
  • Estate administration expenses
  • Executor fees
  • Attorney fees
  • Appraisers fees
  • Court costs
  • Brokerage fees
  • Insurance costs while estate is still open
  • Maintenance costs of estate property
  • Accountant fees
  • Unpaid property tax
  • Income tax on property
  • Income tax earned by estate
  • Income tax earned by trusts
  • Federal gift and estate taxes
  • Federal generation-skipping transfer tax
  • State death taxes

With all of the areas that an estate can shrink after a person’s death, there are also some causes of estate shrinkage while a person is still alive.

Hidden Causes of Estate Shrinkage

There are some common causes of estate shrinkage.  These include:

  • Incapacity – One of the most important components of estate planning is planning for the inability to take care of oneself or continue to produce income.  Should incapacity hit and a person is not prepared, their estate could be financially overwhelmed.  A vital component of estate planning is planning for incapacity.  
  • Lack of liquidity – If there is not enough cash in an estate to pay all of the expenses when they are due, the personal representative of the estate may be forced to borrow money at a high interest rate or sell estate assets at a much lower price than they are worth.  Therefore, keeping enough assets in a liquid state is important in estate planning.
  • ineffective estate plans – Depletion of an estate can occur when wills or trusts are outdated or poorly planned.  Annual review and regular updates of an estate plan can help the estate to settle and close quicker which can save the estate money.
  • Expenses that increase over time – Fees such as attorney or administrative fees can gradually increase over time.  Insuring estate property and the costs associated with maintaining that estate can add up also.  Keeping an eye of these fees and expenses can save the estate thousands of dollars over time.
  • Inflation – When inflation rises, if an estate does not keep up, the overall value of the estate can suffer.  Even when the dollar value of an estate increases, if inflation outpaces this increase, the estate will not be worth as much.  A depressed economy can have the same effect on the value of an estate.  

Preventing Estate Shrinkage

The first step in preventing estate shrinkage is becoming aware of the problem.  Then, take steps to eliminate the problems.  By following these steps, estate shrinkage can be prevented.

  • Minimize estate taxes – The greatest factor when shrinking an estates amount is estate taxes.  Carefully search for a financial expert who can help take advantage of any allowable deductions and credits, employ estate freeze techniques, and plan for all activities when the estate passes on to the next generation.
  • Plan for incapacity – If incapacity strikes, if not prepared, a large portion of an estate may be eaten up with health care, long-term care, and other expenses related to care.
  • Provisions for liquidity – In order to meet estate expenses when due, planning now must be done to guarantee adequate liquidity is present.  Life insurance is the most common way to make sure necessary liquidity is available and replace wealth lost to estate shrinkage factors.
  • Review final plans – Periodically review the plans made to ensure that all of the estate planning tools such as trusts, life insurance, the will, etc., will work as intended.

Famous Americans such as Franklin D. Roosevelt, Elvis Presley, and Nelson Rockefeller have had between 28% – 73% of their estates suffer shrinkage from federal and state estate taxes and estate administrative costs.

Growth Strategies

A retirement plan should include guaranteed income, growth, and the flexibility to change.  Four key strategies to plan for a long and happy retirement with enough assets left over to leave family members include:

  • Longevity – With many people living into their 80s and 90s, it is a likely reality that income for 30 years or more will be needed.  Planning for these extended years is a vital strategy in retirement planning.
  • Inflation – Over the course of 30 years, inflation can have a devastating impact on savings if not addressed.  Realizing that what $1 can buy today will likely take $1.60 in 20 or 30 years will help with retirement planning.   
  • Market volatility – The most common way for retirement assets to grow is with the stock market.  But with the ups and downs of a volatile market, many investors can become nervous.

Withdrawals – Deciding how much money to withdrawal from savings, especially during the early years of retirement, can be the difference between having enough money to last the retirement years or running out of money.  A good rule of thumb is between 4 to 5 percent annually in the early years of retirement.

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