Planning After a Market Decline and for Future Volatility

Market values can change rather dramatically and quickly — and not always for the better. As the markets fluctuate, it is human nature to experience fear and anxiety. But proper planning and execution can provide savvy investors with key opportunities to take advantage of market downswings.

An ideal, goals-based plan will consider a client’s short- and long-term objectives and should include stress testing for market uncertainty. So when markets decline, it’s important to ask: “Have my goals changed?” If the answer is no, then it’s likely the plan you developed with your advisor is still appropriate. However, following a market downturn, it is still a good idea to meet with your financial team and review your plan.

As you revisit your plan with your tax, legal, and financial advisors, you may be able to implement strategies that can take advantage of reduced asset values.

Tax Strategies

Roth Conversions

Reduced asset values may present the opportunity to convert your traditional IRA to a Roth IRA. Although a Roth conversion will create a current tax liability, the tax bite will be smaller while asset values are depressed, and appreciation after the conversion would be excluded from income taxation.

Grantor-Retained Annuity Trusts (GRATs)

When interest rates are low — which they are from a historical perspective — and the asset contributed is expected to have strong growth, GRATs can be effective in transferring substantial wealth without being subject to gift taxes.

Defective Trust Sales

A defective trust sale allows you to freeze the growth in your estate with respect to assets sold to the trust at the applicable federal rate. Business owners may be able to take advantage of depressed values and so-called valuation discounts to shift business interests to younger generations.

Life Insurance

Following a market pull back, you may be able to replace an underperforming policy with a new policy in a tax-free exchange.

Lifetime Gifting

If you are making annual gifts to family members, consider the following while the market is down, which will allow for greater appreciation and growth when the market rebounds:

Make gifts of marketable securities.
Contribute to 529 plans.
Consider using lifetime exclusions.

Leveraged Gifting

A senior generation family member could borrow against assets and give that cash to a younger family member, allowing the junior generation member to invest in the market and receive a cost basis in the investments.

Wealth Management Strategies

Tax Loss Harvesting (Perhaps Offsetting Gains)

A market decline may allow positions to be sold and the resulting capital gain to be offset by realized losses on other positions. If the portfolio doesn’t have offsetting positions, perhaps losses can be harvested for use in offsetting future capital gains.

Exercise Compensatory Non-Qualified Stock Options

If you have non-qualified stock options, consider exercising the options and holding the shares. The reduced spread between the strike price (the price at which the option can be exercised) and the current share price may provide an opportunity to reduce the tax that would be due on exercise.

Borrowing to Pay Tax

Rather than liquidating assets at a loss to pay a tax liability, it may make sense to borrow to fund your tax bill and wait for the market values to return, at which time assets can be liquidated to repay the debt.

It is always important to discuss the options outlined above with your tax, legal, and financial advisors, who can explain the full impact of implementing these tactics.

Conclusion

Emotions can run high in times of uncertainty, and when reason is overwhelmed by emotion, decision-making often suffers. Your PNC Private Bank team is here and ready to help guide you through your choices by offering solutions and illustrating how these various options can affect your overall long-term plan.

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