The ups and downs of the stock market can make people feel uncertain about their financial future. During periods of market volatility, estate planning might not be top of mind. However, it’s important to ensure that your current financial situation and estate plan are still aligned to achieve your goals. Reviewing your plan during turbulent times can help you avoid unintended tax consequences and take advantage of specific tools and strategies designed to capitalize on market fluctuations.
Can you benefit from market changes?
Surprisingly, a volatile market can present opportunities in estate planning. Here are some strategies to consider:
- Gifting depressed assets: Gifting stocks when their value is low can be highly efficient, allowing you to transfer a greater portion of your estate while using less of your lifetime gift and estate tax exemption (currently $13.99 million per person, but set to decrease by 50% at year-end unless legislation changes this).
- Roth IRA conversions: Converting a traditional IRA to a Roth IRA during a downturn can result in lower income taxes on the conversion amount, along with other long-term income and estate tax savings.
- GRATs and CLATs: Certain gifting techniques, such as Grantor Retained Annuity Trusts (GRATs) and Charitable Lead Annuity Trusts (CLATs), may be more successful if the market recovers. These tools can transfer wealth more efficiently if the gifted stocks grow at a faster rate than IRS projections.
- Swap powers in irrevocable trusts: If you have previously gifted assets to certain irrevocable trusts (often called grantor trusts), you may want to swap low-value assets you own with cash or more stable assets in those trusts. This allows future appreciation to take place within the estate and gift tax-protected trust.
Can trustees mitigate risk from market changes?
Yes. If you serve as a trustee for an irrevocable trust, it’s important to manage the risks associated with market volatility. These risks can include the inability to meet beneficiary needs or even personal liability if beneficiaries claim that you did not act prudently. There are steps you can take to full your duties, protecting yourself and the trust beneficiaries.
What should you do now?
Consult your financial and legal advisors to reassess your planning. Here are some steps to take:
- Review your estate plan: Make sure that specific gifts to beneficiaries still align with your goals and are practical given the changed financial landscape.
- Plan for strategic gifting: Identify assets to gift, determine value points that make gifting advantageous, and consider setting up trusts to receive gifts at an opportune time.
- Leverage swap powers: Look for opportunities to exchange assets with irrevocable trusts to manage volatility risk or take advantage of potential market recoveries.
- Be a proactive trustee: If you are a trustee, review and rebalance the trust’s investment portfolio with an emphasis on diversification and long-term strategy. Ensure the trust has enough cash reserves to meet short-term needs, even during market downturns, document your decisions, and keep beneficiaries informed as appropriate.
By implementing these strategies, you can ensure that your legacy goals are met and may be able to take advantage of market fluctuations to transfer wealth more efficiently and reduce estate and gift taxes. If you’d like to discuss your estate plan in light of current market volatility, please reach out to us.
For further information, please contact:
Elizabeth A. Bawden, Partner, Withersworldwide
elizabeth.bawden@withersworldwide.com
