Estate Planning Considerations During Market Volatility

Make larger lifetime gifts: With a decline in value, gifts utilizing these temporarily depressed valuations can significantly amplify the benefit of using the current increased lifetime exemptions. The opportunity remains present even when considering an extension of the increased exemptions. Consider gifts to Dynasty Trusts that are not subject to estate tax (or GST tax) again until the trust terminates.

Fund a Grantor Retained Annuity Trust (“GRAT”): Fund new GRATs with drawn-down securities expected to rebound as economic conditions or market reactions normalize. If the contributed asset values recover, most of the appreciation will pass to family beneficiaries with little or no transfer tax cost.

Sell Assets to Irrevocable Grantor Trusts: Installment Sales to Irrevocable Grantor Trusts (“IGTs”) operate mathematically like GRATs, transferring appreciation on assets sold – above a statutory interest rate – to multigenerational trusts for the benefit of family at no transfer tax cost. A trust purchasing the asset at a depressed valuation can amplify the appreciation transferred.

Asset Swaps with Grantor Trusts: Swapping a well-performing asset in a Grantor Trust with a depressed asset will transfer the appreciation on that asset to the trust with little to no transfer tax cost.

Consider Refinancing and Asset Substitutions: Loans, GRATs and Sales to IGTs shouldn’t be ‘set it and forget it’ planning strategies. All can benefit from ongoing monitoring and occasional modification when economic circumstances warrant.

Income Tax Planning Opportunities in a Volatile Market

Consider Roth Conversions: Market volatility can create opportunities if considering a full or partial Roth IRA conversion. Converting retirement savings from a traditional IRA to a Roth IRA while portfolio values are temporarily depressed should result in a lower overall income tax liability. Generally, post conversion, any growth associated with the market recovery and all subsequent appreciation will not be taxed as ordinary income when the funds are withdrawn from the Roth IRA.

Tax Loss Harvest: Harvesting portfolio losses regularly and proactively, either as part of periodic rebalancing or more tactically as particular sectors, managers or positions experience down-side volatility, can produce significant tax savings over the long run, effectively boosting your after-tax return.

Crypto Tax Loss Harvest: In periods of trading volatility, crypto trading losses can be harvested while new positions are repurchased simultaneously, thereby always maintaining desired economic exposure.

Exercise your Options: If holding vested but unexercised non-qualified stock options (“NQSO”) or incentive stock options (“ISO”), consider whether an opportunistic exercise in a market downturn might be beneficial. Since compensatory options are taxed as ordinary income on the spread between their grant price and strike price, exercising at depressed market valuations has the potential to convert post-exercise stock appreciation into more favorably taxed long-term capital gain upon subsequent sale (if held for at least one additional year).

Wealth Planning Opportunities | Recommended Next Steps

As with any wealth planning and preservation strategy, it is important to have a full understanding of the potential impact of tactical choices such as those highlighted above on your overall investment, wealth, and income tax planning goals. We recommend seeking advice from advisors with relevant expertise. We also encourage having an ally working on your behalf to coordinate with the right resources to seek that silver lining on your behalf.

If you are a client of Pathstone, please contact your advisor for tailored guidance, which may include referrals to professionals qualified to provide appropriate services. If you have any questions or would like to discuss wealth planning opportunities in a volatile market, please contact us here.