Opportunities may exist even in a down stock market and battered global economy — if you know where to look. The record-low interest rates and depressed equities prices we’ve seen can offer rare chances to explore strategies aimed at protecting and growing your wealth, and to reassess ways of transferring your assets to future generations.
Dollar-Cost Averaging
As the stock market continues stagnating, many investors are rushing to snap up depressed shares on the cheap. Although not a bad idea in principle, trying to time the market and buy chunks of stocks at what seem like bargain levels could lead to losses later should prices fall even further.
One way to hedge this risk is with dollar-cost averaging, whereby an investor buys a fixed dollar amount of a specific security regularly — say, monthly or quarterly — over a period of time. This tends to spread out the risk of another price drop but leaves open the potential for gains should the asset recover because you are buying more shares at lower prices and fewer at higher prices, says Katherine Nixon, chief investment officer of the northeast region for Northern Trust in New York. “The beautiful thing about dollar-cost averaging is that it helps investors avoid making the typical mistake of buying high and selling low,” she says. “You’re doing exactly what you should be doing.”
This is particularly good market right now for dollar-cost averaging strategies, Nixon says. “No matter what the market is doing, dollar-cost averaging allows you to take a long-term strategic view of your assets.”
Wealth Transfer Planning
In the current market, investors looking to take advantage of low interest rates and depressed values have many opportunities to adjust strategies for distributing their estate.
Tax-Free Gifts
It’s always a good idea to maximize the annual $13,000 tax-free per beneficiary gift allowance, says Ray Odom, director of wealth transfer services at Northern Trust in Chicago. “This is a no-brainer,” Odom says. “At the absolute minimum, you should be distributing your wealth to this limit every year to as many beneficiaries as possible.”
But in this type of economic climate, it’s especially wise to pass along securities at their present value — likely the lowest they’ve been in years — to get them through the tax process and into the hands of your beneficiaries. “When the prices of the assets go back up, your beneficiaries will already have the asset, and the appreciation to them will be significant, but without the gift-tax burden,” Odom says. “Why not give away the shares that you are most confident will go back up while it’s most affordable from a tax perspective to do so?”
Lifetime Gift Exclusion
Consider this recession also as a prime opportunity to use your $1 million lifetime gift exclusion. “When will there ever be a more opportune time to transfer assets?” Odom asks. “You might as well take advantage of the current economic crisis to pass along a sizable chunk of your portfolio at its depressed value.”
GRATS
The same kind of logic in transferring assets at an undervalued price also applies to the wealth transfer vehicle known as a grantor-retained annuity trust (GRAT). The grantor of a GRAT gets a standard annuity payment throughout the duration of the trust, while the beneficiaries receive all the interest plus the appreciation of the security. With a current Internal Revenue Service-set interest rate of only 2.6%, establishing a GRAT now can represent minimal risk to pass along wealth, with a low hurdle to clear to make it worthwhile.
“In a GRAT, all appreciative value is passed along to beneficiaries,” Odom says. “And with the historic low rates of today, this is a great opportunity to transfer seasoned stocks at artificially depressed rates.”
Real Estate
Real estate offers another opportunity for affordable wealth transfer during this recession. The lowest interest rates in decades combined with the glut of pre-existing homes for sale offer an unusual opportunity to buy more with less. This makes it a great time to help your adult children or grandchildren purchase their first home through an intra-family loan. The applicable federal rate for short-term loans is at an historic low (0.76% in May 2009), so an intra-family loan benefits both you and your beneficiaries, says Grace Allison, tax strategist for Northern Trust in Chicago. Your children may be able to take advantage of the first-time homebuyer’s credit of up to $8,000, and you can safely transfer wealth without affecting gift tax limitations.
Investing in Municipal Bonds
At the very minimum, bear markets provide an opportunity to re-evaluate your current investment strategies and make requisite adjustments to your portfolio. When determining which components to jettison and which to retain, conservative investors may want to consider adding a mix of municipal bonds to their portfolios.
A tax-free status and long-term fixed rates make munis an attractive option that tend to ensure consistent, stable cash flow. Further, given the presently depressed value of a number of marquee stocks, long-held munis producing nominal annual returns can provide at least some stability in an otherwise volatile market.
