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Making Use of Market Volatility

Turn a portfolio’s lemons into lemonade.

Market volatility should make estate planners smile. While portfolio managers try to keep their palms dry, estate planners can often offer opportunity in wild markets.

Clients with taxable estates (currently, over $5.45 million for individuals or $10.9 million for married couples) generate transfer tax savings by making gifts when asset values are low and have potential for future appreciation. When markets swing, those low-value/high-appreciation opportunities can open up.

For estate planners in sync with their clients’ portfolio managers, the options to achieve transfer tax savings are actually greatest when markets are liveliest.   

For example, when markets dip, estate planners should have their grantor retained annuity trust (GRAT) forms at the ready. With Internal Revenue Code Section 7520 rates around 2 percent, it doesn’t take much for a GRAT to be successful with securities whose value is impacted negatively by general market swings. Especially with large, concentrated holdings, the potential to transfer a portion of the shares at limited or no tax cost is likely to be well worth the attorney fees. An insightful estate planner may also go further and realize the opportunity to transfer oil royalties when oil prices drop, or an interest in the family farm when corn prices swoon, or other assets impacted by any of the numerous financial considerations that ripple through the markets.

In each of these situations, estate planners can potentially provide the sugar to turn a portfolio’s lemons into lemonade. Even for clients without taxable estates, a basic estate plan with intentions clearly expressed and appropriate people and professionals in place can help instill a sense of control in uncertain markets and ultimately mean more to a family’s financial and nonfinancial future than any investment return.

Do you have other ways to use market volatility for estate planning? How do you help clients feel in control when markets go wild?

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