Six Wealth Planning Strategies for Stressed Markets

4 Minute Read

With volatility comes opportunity – particularly when you have a framework to identify it.

Market volatility is unsettling for even the most sophisticated investors. Extreme market volatility can feel overwhelming and chaotic, particularly when the advice you receive is to resist taking action in your portfolio and remain committed to your long-term asset allocation and wealth plan.

But there are many actions you can take outside of making major portfolio moves. In fact, certain wealth planning strategies can be even more effective during market corrections. Below are six examples of such strategies. We recommend exploring those that align with your priorities with your advisors during this volatile period.

Establish a Grantor Retained Annuity Trust

In general, gifting securities now when valuations are down, including through annual tax-free gifts or any or all of your lifetime gift exclusion,1 can enhance the value of those gifts as valuations recover in the future. Gifts may be made outright or in trust. And for some, a Grantor Retained Annuity Trust (GRAT) offers a particularly effective way to make gifts of low value securities.

A GRAT is a type of irrevocable trust where grantors can place appreciating assets in exchange for receiving fixed payments for a period of time. It offers a valuable opportunity to transfer excess investment return to beneficiaries with little or no gift tax. It is a particularly effective technique at lower interest rates and market values because the “hurdle” rate above which excess return must be generated is lower, and price appreciation potential is greater.

When exploring this strategy with your advisors, you will want to consider the following:

  • Your capacity to make an irrevocable gift; a goals-driven approach to managing your wealth can help you gain this clarity
  • Varying GRAT scenarios using the current Section 7520 rate, or “hurdle” rate
  • Which assets you own that have high appreciation potential
Convert a Traditional IRA to a Roth IRA

A Roth IRA is a retirement account that grows income tax free, allows contributions to be made at any age (subject to limitations), generally provides for tax-free withdrawals after age 59-1/2 and has no required minimum distributions.

You can convert your traditional IRA to a Roth IRA. Future distributions will be income tax-free, but income tax will be due for the year of the conversion based on the value of your account at conversion. Where a conversion otherwise makes sense, executing a conversion when asset values are lower can reduce the tax cost.

Work with your advisors to determine if a conversion makes sense for you, including by estimating the related income tax due and identifying the source of funds with which to cover it.

Substitute Assets in Existing Trusts

If you have previously created irrevocable grantor gift trusts that allow you to substitute assets, substituting assets with better growth potential can optimize the power of the gift trust. To execute this strategy, you will need to work with your advisors to:

  • Review the assets of the trust – their tax basis and fair market value – and identify assets with low basis and high value
  • Review your balance sheet to identify assets to substitute – assets with high basis, low value and potential for appreciation
  • Develop and execute a plan to substitute assets with your trustee and tax advisors
Harvest Tax Losses

Harvesting tax losses means selling securities that have experienced a loss in order to offset taxes on gains and income. When executed properly, this strategy can reduce your overall tax burden; however, there are “wash sale” limitations that prevent selling and purchasing substantially identical assets within a window of time. Therefore, you should work closely with your portfolio advisor to avoid wash sales and understand how your asset allocation might be impacted.

Exercise Stock Options with Cash

Many executives who hold company stock options choose to make a cashless exercise, selling just enough stock following the exercise to cover the cost of the transaction and negating the need for a cash outlay. But if your options have a near-term expiration date and you expect the stock to appreciate – as in a distressed market that you anticipate will recover – you can avoid selling into a down market with a cash exercise. This is a very complex strategy with risks that need to be evaluated with your advisors. Together, you will want to:

  • Evaluate how to exercise your options given current market conditions
  • Identify sources of funds for tax payments other than the underlying stock
  • Coordinate carefully with your portfolio advisor, broker and company
Take Strategic Low-interest Rate Loans

With interest rates at historic lows, a line of credit can be an attractive option for several reasons. If you face liquidity constraints, it can negate the need to sell assets into a down market and allow you to maintain your investment strategy. Even if you do not face liquidity challenges, establishing an opportunistic low-interest line of credit could be beneficial for funding major purchases, diversifying, taking advantage of investment opportunities, transferring wealth or optimizing taxes.

Low interest rates are also beneficial for intra-family loans, which allow family members to loan money to other family members at a below-market, IRS-sanctioned interest rate. It is common, for example, for the senior generation to provide an intra-family home loan to the younger generation, who may not have an adequate balance sheet for direct borrowing from a bank. When structured properly, this is considered an arm’s length transaction by the IRS and has no gift tax consequences. With Treasury rates expected to remain at historic lows in coming months, it could make sense to consider refinancing existing intra-family loans at lower rates.


Review and Optimize Your Plan

While the current period of market stress is unsettling, it provides the opportunity to review and optimize your wealth plan, including by implementing strategies such as the above that fit your circumstances. It also highlights the importance of having a plan that engenders confidence and positions you to fund your highest priority goals during market downturns. For additional wealth planning strategies or an introduction to our Goals-Driven Wealth Management approach, please contact one of our advisors.

  1. The current 2020 gift tax exclusion amount is $15,000 per individual per recipient and $30,000 per married couple per recipient. The lifetime exclusion amount is currently $11.58 million per individual.

Disclosures

This information is not intended to be and should not be treated as legal, investment, accounting or tax advice and is for informational purposes only. Readers, including professionals, should under no circumstances rely upon this information as a substitute for their own research or for obtaining specific legal, accounting or tax advice from their own counsel. All information discussed herein is current only as of the date appearing in this material and is subject to change at any time without notice.

The information contained herein, including any information regarding specific investment products or strategies, is provided for informational and/or illustrative purposes only, and is not intended to be and should not be construed as an offer, solicitation or recommendation with respect to any investment transaction, product or strategy. Past performance is no guarantee of future results. All material has been obtained from sources believed to be reliable, but its accuracy, completeness and interpretation cannot be guaranteed.