Strategies for Financial Security Amid Global Economic Uncertainties

Understanding the Global Economy amidst COVID-19

With the outbreak of COVID-19 in March 2020, there has been a significant impact on the global economy, creating a climate of financial insecurity. This climate has led to market fluctuations causing concerns among families planning for retirement, college expenses, and other major financial commitments.

Effects on College Costs and Government Education Grants

Many families are receiving college acceptance letters while also worrying about the prospect of fewer government education grants and the impacts of fluctuating markets. The question on many minds is, “How will this all play out?”

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Importance of Long-term Financial Planning

If you had a financial plan in place before the recent market fluctuations, it should have provisions built in for such downturns. However, if you do not have a plan, it is a good time to consider devising a long-term strategy that takes into account different economic scenarios.

Liquidity and Tax Impact Considerations

If you need liquidity, for example, to pay for college, it’s crucial to consider the after-tax impacts. Instead of just looking at a valuation and liquidating, remember that money is fungible and your after-tax bottom line is what you should be focusing on.

In the current financial climate, we have identified eight planning strategies that are particularly effective. These strategies have been shared with our clients and we are now sharing them with you to help navigate these uncertain times.

Gifting Depreciated Assets

With the recent drop in asset values due to the challenging market conditions, this might be the perfect time to gift assets. By doing so, you’ll maximize your federal lifetime gift tax exemption and any future appreciation of the gifted assets will be outside of your estate.

Maximizing the High Federal Gift Tax Exemption

Many of the tax provisions of the Tax Cuts and Jobs Act (TCJA) are set to expire at the end of the year. One of them is the federal estate tax exemption which is expected to drop by almost half unless Congress takes action. Use this opportunity to make larger gifts now while the exemption is high.

Trust Gifting

Consider using a trust for making large gifts. A trust can be structured as a grantor trust, which is disregarded for income tax purposes. The grantor continues to be responsible for the income tax associated with trust assets.

Taking Advantage of Low Interest Rates

Some estate planning strategies are more effective in a low-interest-rate environment. Consider strategies such as Grantor Retained Annuity Trust (GRAT), Intrafamily loans, and sales to an Intentionally Defective Grantor Trust (IDGT).

Roth IRA Conversion

A Roth IRA can be an effective planning tool, especially given the threat of higher tax rates. By preserving a Roth IRA for as long as possible, you provide the opportunity for maximum tax-free growth.

Tax-loss Harvesting

During challenging market conditions, consider harvesting portfolio losses to offset future gains. Just be mindful of the wash-sale rule which disallows losses if you buy back the same or substantially the same stock 30 days before or 30 days after the sale.

Moving Assets to Delaware

If you live in a high-tax state, consider establishing a trust or moving an existing trust to a tax-friendly jurisdiction, such as Delaware. This could help reduce or eliminate state taxes on some income.

Reexamining Existing Trusts

Review existing trusts with a swap power during this time of low valuation and interest rates. Swapping assets with the trust can effectively freeze the assets inside the trust and protect them from future downturns in value.