Portfolio Shrunk, Now Review Your Last Will

OK, take a deep breadth. We've all taken financial hits. The DJIA closed at 12,514 on January 12, 2007 and touched an intraday low of 7982 on November 13, 2008, a loss of 36% in less than two years. In these troubled times, you have many other issues to concern yourself with but another to put on the "to do" list is review your last will. Why? Falling net worth results in specific bequests (both charitable and otherwise) eating up an increased percentage of your estate. The assets of a probate estate are paid out in a specific order: (a) administrative expenses of the estate such as attorney fees, (b) debts of the estate such as taxes, (c) specific bequests, (d) the residuary of the estate. This means a loss in value comes out of the residuary of the estate first. Let's break down an example. In 2007 when he executed his last will, Joe had a net worth of $1.5 million. Let's assume Joe's 2007 last will has specific bequests as follows:

• $50,000 to each of two sons
• 5 nieces and nephews, $10,000 each,
• Boys and Girls Club $50,000,
• remainder to wife.

If Joe dies with the same net worth as in 2007 (i.e., $1.5 million), the distributions from his estate might look like this:

• $10k for attorney fees and probate court costs,
• $100k to sons,
• $50k to nieces and nephews,
• $50k to Boys and Girls Club, and
• $1.29 million to wife.

Wife comes out fine (depending on your perspective) with $1.29 million. But checkout the effect of a 30% drop in Joe's net worth to $1.05 million due to taking a hit in the stock market.

• $10k for attorney fees and probate court costs,
• $100k to sons,
• $50k to nieces and nephews,
• $50k to Boys and Girls Club, and
• $840k to wife.

$840,000 sounds like a comfortable amount of money on the face of it but consider this might include the equity of the primary home. For argument's sake, let's say Joe's home has $400k in equity. That leaves $440k in cash for Mrs. Joe. Not in dire straights but not comfortable either. Mrs. Joe might be forced to sell the home if extraordinary expenses pop up like medical bills in the family. With this information in mind, Joe may want to reduce some or all of his specific bequests to push more assets down into the residuary of his estate for the benefit of his wife.

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