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CASE 4

Rethinking longtime holdings and passing down her wealth

October 19, 2008

Lilly has a diversity problem -- a couple of them, actually. First, too much of her net worth is tied up in the stock of her late husband's company. Second, a significant source of her monthly income -- rent payments -- is dependent on a single apartment building.

She should resolve the first issue by selling most, if not all, of the stock. Even though the shares have fallen 35% this year, Gagne said it was important to salvage the gains Lilly still has, pay the capital gains taxes (which will be lower because of the recent decline) and immediately reinvest the money in mutual funds that fit her asset allocation goals (40% stocks, 5% commodities and 55% bonds).

"A 74-year-old lady shouldn't have so much of her wealth tied up in a single stock," Gagne said, "and the advice would be to sell it, whether we were in a bull market or a bear market."

As for the apartment building, Lilly should work with her financial planner and a real estate broker experienced in so-called 1031 exchanges to essentially swap the apartment building for an ownership stake in a group of rental properties. That would spread her ownership risk among several buildings, relieve her of the chore of managing the property and provide a tax break (1031 exchanges are tax-deferred transactions).

She also should take out a home equity line of credit on her house that she can tap in emergencies. (She should be able to get one despite the current credit crunch because she has good credit and owns her home free and clear.)

Finally, Lilly needs to meet with her planner and an estate attorney to work out a detailed plan for passing her wealth on to her children and grandchildren.

Lilly

Lilly, 74, is a widow with three adult children and four grandchildren. She is retired and owns a house in Sherman Oaks.

Assets

* Brokerage account: $200,000 in public stock of late husband's company

* IRA: $145,000

* House: $850,000

* Apartment building: $1.9 million

Debt

* Mortgage on apartment building: $1.3 million

Annual income

* Social Security: $15,000

* Rental income: $30,000

* IRA distributions: $20,000 (of which $6,000 is the IRS required minimum distribution)

Objectives

* Concerned about the threat of inflation

* Passing her wealth to her children

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