Can Your Financial Plan Handle Volatility? – When financial markets hand you a lemon, it’s a chance to make lemonade in your estate plan. If stocks and bonds hit a turbulent patch, one philosophy says to patiently sit out the bumps and hang on until we reach the other side. While that may be a prudent approach for an individual investor’s own portfolio, other principles apply when it comes to updating your estate.
A volatile market provides the opportunity to mitigate tax exposure. The end goal is to leave your heirs the maximum sums of money permissible. You can accomplish that by adjusting the structures you are using. Tax laws are constantly evolving. Keep on top of the latest developments in order to ensure your assets reach the intended heirs in the optimal time and manner to exploit any tax-free transfers and pay at the lowest rates.
Gifts that go on giving
Consider gifts. When markets have fallen and asset prices are under pressure, you can give more stocks or bonds to make up your annual gift allowances. Another way to squeeze the lemonade is by making interest-bearing loans. If the beneficiary uses the loan money to buy depressed assets and those assets subsequently gain more than the interest rate you are charging on the loan, the beneficiary can keep the difference between the return and the interest rate tax-free.
Consider shifting income to younger generations, who may be in lower tax brackets, or making trust distributions to beneficiaries who are taxed at lower rates. It may work better to avoid overly specific bequests. For instance, you could set more flexible equations to capture upper or lower limits. In other words, you might leave values or percentages, such as $100,000 or 25% of the estate, whichever amount is less. Executors could make more efficient distributions that way as the market zigs and zags.
Changing horses midstream
You might also switch to some of these structures.
GRATs are great: A grantor retained annuity trust is irrevocable. The grantor contributes an amount to the trust for a specified period. The interest rate is set by the IRS. The grantor receives back the principal and interest at the end of the payback term, paying no gift tax. Better yet, any amounts that exceed the initial contribution and interest can be relayed untaxed to beneficiaries. Last, during the GRAT period, the grantor pays tax on the gains, while the assets keep increasing. If you get the timing right and the assets grow handsomely during the GRAT period, you can transfer significant amounts without incurring gift tax.
Roth conversions get ruthless: In 2019, Congress passed the SECURE Act, ending provisions that allowed individuals to stretch IRA benefits over several generations. Now those who inherit IRAs must withdraw the holdings over 10 years. Yet if you convert a traditional IRA to a Roth IRA, the assets can continue to grow tax-free for generations. Conversions can be expensive, but the silver lining is that when asset values are down, conversion taxes are likewise lower.
A flexible flaw: An IDGT (intentionally defective grantor trust) sounds suspiciously lacking! Why is it defective? Assets are removed from an irrevocable trust, yet the grantor still pays tax on the trust income during their lifetime. (That is the so-called defect.) The value of the estate is lowered, and gift taxes are avoided.
These strategies can help your estate and beneficiaries minimize taxes. They are complex, though, so be sure to explore the ins and outs thoroughly with your attorney or financial planning adviser.
Copyright, 2022
Did you enjoy reading, Can Your Financial Plan Handle Volatility?
Interested in learning more about this subject? Attend our upcoming estate planning webinars!
Have You Properly Protected Your Loved Ones? (FREE Estate Planning Workshop), Trustee and Power of Attorney Training School Webinar, Medi-Cal Webinar, Probate Webinar, and our What To Do When a Loved One Dies Webinar Series. Get registered today for our estate planning webinars!
This website is not intended to be a source of solicitation or legal advice. General information is made available for educational purposes only. The information on this blog is not an invitation for an attorney-client relationship, and website should not be used to substitute for obtaining legal advice from a licensed professional attorney in your state. Please call us at (626) 403-2292 if you wish to schedule an appointment for a legal consultation.
For more information about The Hayes Law Firm, visit our Google My Business page.
Thanks for reading, Can Your Financial Plan Handle Volatility?
- Avoid These Top Trust Problems - September 18, 2023
- Should I Leave My Child A Buck? - September 12, 2023
- For Estate Planning, Try FIRE - September 12, 2023
Office hours
Map
The information on this website is for general information purposes only. Nothing on this or associated pages, documents, comments, answers, emails, or other communications should be taken as legal advice for any individual case or situation. The information on this website is not intended to create, and receipt or viewing of this information does not constitute, an attorney-client relationship.