Jerry Love
Jerry Love
Legacies in Limbo

Why now's a good time for seniors to reposition their portfolios for the next generation.

March 19, 2009
by Jerry Love, CPA, PFS

It's ironic and sad that many older clients are panicked about whether or not they will live to see the stock market rebound. Though these aging patriarchs and matriarchs have ample income for their own lifetime needs, they are concerned about the seemingly depleted inheritance they will be leaving their children and grandchildren. For these clients who have accumulated a large investment portfolio, what is under siege is their legacy, a point of pride for hardworking seniors and, during these rocky times, a potentially critical financial resource for their heirs.

In fact, the intelligent portfolio position for those 75-plus is frequently foreign to them. For years, as they grew older and neared retirement, their financial advisers (assuming they had competent ones) adjusted their investments to be ever more conservative. And now, in their twilight years, we are advising them to somewhat reverse this direction either by staying in the market or perhaps even increasing their investment balance to include a higher percentage of stocks. You must admit, this could be seen as a tad confusing!

Rebalancing Investments

This is why we must take care to explain the reasoning behind how we rebalance investments with beneficiaries in mind during the current market conditions. Consider an 80-year-old man with children in their 50s. We expect that the markets will recover before his children will be needing income from investments for retirement. Now is the time to buy, not sell. The biggest fallacy of getting nervous over the stock market and cashing out is that by doing so, our octogenarian may be locking in a permanent decline in the value of his estate because he sold stock investments when they were at a low value — probably the lowest of his lifetime.

Should older investors insist on selling investments and moving to cash and leaving their assets in cash until they pass away, their heirs will likely come up short down the road. For example, say our 80-year-old client had a portfolio worth $10 million that recently declined to $5 million in value. What is the probable scenario if that $5 million is moved to certificates of deposit (CDs) and our client lives four more years? Assume that the stock investments have rebounded to $8.5 million by the date of death. The $5 million in the CDs would have been worth $3.5 million more had they had been kept in the stock portfolio.

Important in this strategy is to ensure that the older client has a comfortable reserve of liquid assets that will cover their required living expenses and provide a stable stream of income. Some clients will need to carefully assess their usual expenditures and divide their investment portfolio into two distinct groupings: one with an investment plan to support their lifestyle and the other designed more aggressively for their heirs.

If the client is comfortable with this concept, the next scenario to discuss is whether he will consider having a family financial summit with the children to allow them input into the diversification and balancing of the portfolio. Obviously some seniors will be open to this cooperative approach and others will not. But parents who have adopted the overall thinking and strategy we have described often find that by giving their heirs input in investment decisions, they experience great peace of mind from sharing the responsibility with those who will be most affected.

One bright side of a market downturn with this strategy is that if parents pass away while values are low, then the children have less estate taxes to pay — no small matter to consider. Some seniors are already transferring assets for that very reason. As early as last October, before the worst of the downturn was even known, financial writer Anne Turgesen commented in The Wall Street Journal that, "With consensus growing that the estate tax won't fade away anytime soon, estate planners say families are getting serious about strategizing for the first time in years. Parents and grandparents are transferring to their heirs' assets that they believe are temporarily depressed — from real estate to stocks to stakes in family businesses — reducing the size of their own estates and giving the heirs the chance to cash in on a rebound."

Interviewed in the same article, Why Now Is the Time to Help Your Heirs, Charles Aulino, director of financial planning at Philadelphia, Pa.-based Glenmede Trust Co., concurred with Turgesen: "Today's low interest rates, plus beaten-up stock values, add up to a very high chance of success."


So while none of us have a crystal ball, which would come in extra handy about now, the strategy we have outlined seems more than plausible. However bleak the headlines are, "sell low" seems unconscionably bad advice to give anyone who has no urgent need for immediate liquidity. And it is certainly not advice we will be giving clients who are looking to preserve their financial legacies.

Having heeded our counsel, our 80-year-old clients now needs to give themselves permission not to worry about the fluctuations in the market or to worry about when the markets will recover or specifically worry that the value will recover during their lifetime. Their plan now effectively crosses the generations.

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Jerry L. Love, CPA, PFS, CFP, has also earned the designation of accredited business valuation specialist (ABV), certified in financial forensics (CFF) and certified valuation analyst (CVA). He is the president/CEO (managing partner) of Davis Kinard & Co, PC, which is the largest CPA firm in Abilene, Texas. From 2006 to 2007, Love served as chairman of the Texas Society of CPAs (TSCPA). From 1999 to 2000, he was the recipient of the TSCPA "Distinguished Public Service Award." In 2006, CPA Magazine listed Love as one of the 100 Most Influential Practitioners in America.