When these dynamics prevail, it’s more important than ever to take proactive measures to protect and preserve your family’s wealth. With careful planning, you can begin to mitigate uncertainty, better secure your family’s financial future, and even find opportunity in turbulent market conditions.  

In this article, we highlight strategies that may help you and your family, today and in the future.

Harvesting Tax Losses

When market volatility is on the rise, you may be concerned that your investment portfolio will experience losses. If so, you may wish to consider a tax harvesting strategy, whereby you may obtain a tax benefit by applying investment losses against current and future capital gains on your personal income tax return. A certain amount of loss can be applied in the current year, with additional losses carried forward to future years, effectively reducing your taxable income. 

Consider Converting a Traditional IRA to a Roth IRA in a down market

In the US, Traditional IRAs and Roth IRAs work very differently with respect to taxation. Traditional IRAs enable you to invest your funds income tax-free, and income taxes are then deferred until you withdraw funds from the account. By contrast, a Roth IRA allows you to invest funds on a post-tax basis, where they grow income tax free, and also do not incur income taxes upon withdrawal from the account. Roth IRAs also have less restrictive distribution rules, allowing for more flexibility in how and when the funds are withdrawn. With these differences, investment in a Roth IRA can be a more attractive option for individuals. In addition, U.S. retirement account rules provide that a Traditional IRA may be converted to a Roth IRA. In a down market, when the value of the IRA may be depressed – this becomes an attractive option since a conversion is treated as a taxable event for the account owner. With a smaller gain, your tax obligation is smaller, and you gain the benefit of future gains that are not subject to income tax upon withdrawal.

Consider Exercising Stock Options

When the stock price of an otherwise valuable company has dropped significantly as a result of a highly volatile and reactive market, owners of Incentive Stock Options (ISOs) and Non-Qualified Stock Options (NQSOs) for these businesses may wish to consider whether it is advantageous to exercise these stock options. Generally, exercising NQSOs is an ordinary income recognition event for tax purposes while exercising ISOs is a recognition event strictly for alternative minimum tax purposes and does not generate ordinary income. When the stock price of a company has temporarily decreased and will rebound sometime in the future, exercising stock options (including ISOs and NQSOs) can potentially result in significant tax savings as compared to a normal year for the market.

Take Advantage of the Low Interest Rate Environment

A low-interest rate environment provides opportunities to leverage low-cost borrowing with the purchase of undervalued assets such as certain marketable securities, private equity, or real estate, or steady-performing and tax-favored assets such as a life insurance policy. If you are planning to leverage strategies that rely on low interest rates, it’s important to stay informed on the trajectory of interest rates and be prepared to act in the event that rates increase.

Grantor Retained Annuity Trusts

Declines in the stock market present opportunities for families to transfer their stock interests at depressed prices, utilizing their gift tax exemption as they transfer a potentially greater value than would have been possible without a depressed stock market.

A grantor retained annuity trust (“GRAT”) may be part of an attractive estate planning strategy in a volatile market with low interest rates. A GRAT allows you to transfer the appreciation in an asset over a certain rate of return (referred to as the “Section 7520 rate”) to the next generation or to trusts for their benefit without the appreciation being treated as a taxable gift. If an investor reasonably believes that the stock market will generally rise in value over a defined period of time, a GRAT may be a powerful tool to transfer such appreciation to the next generation.

Intra-Family Loans and Sales to Defective Grantor Trusts

Another wealth transfer strategy is using loans made to family members or trusts for their benefit. As with a GRAT, to the extent that the investments made by the family member or trust perform better than the minimum rate of interest (the “applicable federal rate” or “AFR”) that must be charged in order to avoid treatment as a gift, the lender will effect a gift tax-free transfer to the borrower equal to the return on the investment minus the interest paid to the lender. This strategy also can effect income tax certain and/or estate tax benefits.

Life Insurance Premium Financing

Using financing to pay life insurance premiums can be advantageous in a low-interest rate environment. The acquisition of a large insurance policy – either by public financing through a financial institution, or by private financing through an intra-family loan from a family member or a family trust – can achieve important estate planning benefits while minimizing out-of-pocket expenses and avoiding the potential trigger of a large gift tax bill during the insured’s lifetime.

The well-being of your family is important to us, and we are here to help you manage your wealth – especially during times of uncertainty. While periods of market volatility can be stressful, there are time-tested techniques that you can implement now for the benefit of your family and the generations that follow you. 

Our Wealth Planning and Advisory team is a group of seasoned experts who can help you identify your family’s values, goals, and objectives, provide guidance on appropriate estate, philanthropic, and family governance structures, and work with you and your legal and tax advisors to implement on your strategies.

For more information and assistance with your planning, please contact us or contact your Relationship Manager.