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Good Tax Planning in a Bad Stock Market


The recent volatility in the stock markets here and around the world got us thinking again about tax planning strategies that might make sense when we do go through the inevitable downturns in the markets. During 2008-2009, we had a number of clients engage in some income/estate tax planning strategies that made great sense. While we don’t think we’re in for another recession and lengthy decline like we had then, it is worth thinking about these strategies on an ongoing basis.

  1. Capital Loss Harvesting – This is part of the standard tax planning routine that we go through with clients on an annual basis. Since you are allowed to offset losses against gains (and then take $3,000 in additional losses against regular income), this is something that should be part of your ongoing portfolio management program. When markets are volatile you can often find opportunities to capture these losses for tax purposes.
  2. Roth Conversions – We regularly use Roth conversions of IRA accounts for clients to shift assets into these vehicles for their permanent tax deferral and ability to avoid the Required Minimum Distributions at age 70 ½. Since you pick up taxable income upon conversion, in a depressed market, the amount of taxable income is lower. We had a number of clients who did Roth conversions of IRA’s that were at low levels in 2008-2009, with the resulting Roth IRA accounts up significantly in the years since then. This creates nice, tax free assets for them and their heirs.
  3. Gifting Investment Assets – For clients who are over the $5.430 million Federal estate tax exemption level, making gifts of appreciating assets is still a core planning strategy. If your state has a lower exemption (as Maryland does currently), there may be even more benefit to doing this. Since gifts over $14,000 per person use up the exemption, making the gift when the asset values are lower makes even more sense. Of course, it might be psychologically harder to move assets to the next generation when your overall asset base is lower due to declines in the market.  But if you can get comfortable with the sufficiency of your assets, it is a great time to do this.
  4. Using Family Limited Partnerships for gifting – In addition to the general benefit of gifting outlined above, there is a lot of talk lately about the ability to take advantage of discounts on such gifts being legislated away in September.  Congress has been targeting this estate planning strategy, specifically taking discounts on minority interests in entities that just hold marketable securities, for many years, but the discussions seem to be elevated now. If you are thinking about doing these kind of gifts, now is the time to act as they may no longer be allowed after the introduction of legislation if it ultimately passes.
  5. GRAT’s - Many of our clients have used Grantor Retained Annuity Trusts to shift wealth to the next generation. With interest rates still at historic lows (the current AFR rate is 2.2%), and if you can invest in a depressed asset in the GRAT, the “hurdle rate” that you need to exceed with the return is a much easier target. As a result, the wealth you can shift to the next generation is much higher.

These are just a couple top of mind thoughts on strategies that might make sense in a prolonged downturn in the equity markets. As we have always said, corrections and downturns are part of the natural cycle (see Chris’ article this month).  Instead of focusing on the downside (your portfolio losing value) take advantage of the strategic tax planning opportunities that are available. Let us know if you would like to discuss any of this.

The views expressed represent the opinions of L.K. Benson & Company and are subject to change.  These views are not intended as a forecast, a guarantee of future results, investment recommendation, or an offer to buy or sell any securities. The information provided is of a general nature and should not be construed as investment advice or to provide any investment, tax, financial or legal advice or service to any person.

Please see Additional Disclosures more information.