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Estate Planning Silver Lining to Stock Market Drop

If your retirement and investment accounts are down, rest assured, you’re not alone. On March 23rd of this year, the S&P 500 was down over 30% from its recent highs. While stocks have rebounded, the major indexes are still well below their 2020 highs.

I’m not writing this article to pound into your head the fact that the equity markets are down (the major news networks have sufficiently done this). Instead, I hope to offer you a silver lining by suggesting a few ways you can actually take advantage of these losses as it relates to your estate planning and financial accounts.

1. Low tax rates result in significant discounts on IRA conversions

If you convert an IRA to a Roth IRA today, you are effectively paying taxes now, while markets are down and tax rates are lower under the Tax Cuts and Jobs Act.

2. Today’s low interest rates create an opportunity to refinance your mortgage debt

You should also consider taking out a reverse mortgage or line of credit, depending on your specific circumstances.

3. Low or No interest loans to your loved ones allow tax-free transfer of assets

With historically low interest rates, now is a great time to make no interest loans to family.  You can make low interest loans to your adult children, and they can use the money to buy low valued assets.

Once these values appreciate, they can cash in some of the assets and pay off the loan. You’ve effectively moved assets out of your estate without paying the gift or estate tax.

Consult with your tax advisor regarding any limits or minimums that apply.

4. Lower asset values allow more property to be transferred below the annual gift tax exclusion

Gifting property to your significant others that has taken a hit in this market, whether directly or through a trust, will allow you to give more tax-free property than you could have before the markets sank. The gift tax exclusion allows you to give up to $15,000 to anyone every year. If married, this doubles to $30,000. Of course, you’re not limited to the $15k/$30k, but any amounts in excess of this will count against your lifetime estate and gift tax exclusion.

By way of example, as we know, the major indexes will bounce back sooner or later (they already are).  If you were to give $15k worth of shares today, as these shares increase 20%, these same shares will be worth $18k. So, effectively, you can now give significantly more shares today than you were able to just 2 months ago tax free. Caveat – try and avoid giving away property for which you have a paper loss – gift property that you still have a gain.

When stock markets are down, know there are estate planning tactics available that you can take advantage of to reduce your estate taxes.