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Estate Planning During the Coronavirus Pandemic

Global chaos can still potentially benefit clients.

As the coronavirus pandemic progresses and markets continue to seesaw wildly, clients will continue to become more and more uncomfortable and unpredictable.

Most advisors are trotting out the well-worn adage of “stay the course.” And, while this advice is as solid as it ever was, and the lessons of 2008 are still fresh in many clients’ minds, the threat of the disease has added an edge that finds some yearning for action.

Normally the fear of dying works against trust and estate professionals. Facing mortality and the difficult conversations that come with it are obstacles that must be overcome in order to even begin building a coherent plan. However, in this case, coronavirus presents a more imminent threat—one that can’t be swept under the rug, so clients may be more amenable to taking action than they normally would.

"It’s a distinguishing feature," said Suzanne Shier, chief tax strategist and tax counsel at Northern Trust Wealth Management. "People care about their wellbeing, that of their families and their communities. This is a correction, yes, but it has at its core a virus that affects people’s true well-being, not just financial. And I think that’s a different level of care or concern.”

Advisors should take advantage of this threat, with fear working in their favor for once, to ensure that clients have at least the bare bones of a plan in place—wills, powers of attorney, beneficiary designations and health care proxies. These are necessary documents, so professionals shouldn’t feel conflicted about “buying land when there’s blood on the streets.” You aren’t selling them anything, just expediting a process they eventually planned to get to anyway (even though many don’t).

But what about clients with plans in place? Is there anything they can do to try and either protect themselves or even benefit from the chaos? Absolutely. There are many vehicles that simply aren’t as effective when interest rates and valuations are high, so there are a plethora of available techniques in a planner’s toolbox that have, suddenly, become more attractive as these numbers dip.

We don’t market time, but if there are dips in the market, we’re prepared to capitalize,” Shier said.

Northern Trust, for example, is recommending the following points of focus to clients:

Make an annual gift exclusion. Clients can make an annual tax-free gift of about $15,000 (indexed for inflation) that does not count against their lifetime gift tax exclusion. Using marketable securities as the gifted asset when volatility is so high and valuations are down can offer some extra mileage on gifts made now as valuations recover in the future.

Make Roth IRA rollovers. Because the “cost” of converting a traditional IRA into a Roth is paying taxes now on the current value of the IRA, it’s best to make these conversions when the market is down. Doing this will also insulate a client from future tax redistribution, assuming tax rates going forward will be the same or higher.

Place assets into existing trusts or fund a new one. Similar to the annual gift, funding a trust with securities while valuations are low allows for more assets to be placed in the trust (when measured against the lifetime exclusion).

GRATS. The timing is perfect—two things increase the effectiveness of GRATs: one is low interest rates and the other is lower market values. We are currently experiencing both. For clients whose existing GRAT terms are coming to an end, it’s probably beneficial to keep them going. Clients without GRATs should strongly consider funding them.  

Be mindful of tax-loss harvesting. Locking in a sale of securities at a loss today to reap the future tax benefits is a good way to find the silver lining in a market downturn. However, stay aware of wash sale rules and tax liabilities. Don’t purchase anything substantially identical within 30 days before or after the sale at a loss or all will be for naught. Though clients may have separate accounts with different advisors, the rule considers them all to be the same, so it’s important to ensure that all advisors are on the same page in terms of what they’re buying and selling, so they don’t mess this technique up inadvertently.

“Many of our clients have experienced major disruptions in the past and have a heightened level of awareness," Shier said. "They don’t want to do anything quickly but are still thinking logically. Many are actually looking for these opportunities."

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