Six Wealth Planning Strategies for Volatile Markets

Market volatility often tests investor resolve, but periods of stress also present significant opportunities for optimizing your plan.

Sustained market volatility often drives anxiety in even experienced investors, challenging their conviction to adhere to investment plans amid both the “news” and the “noise.” Such periods of disruption, however, are also accompanied by opportunities — including several wealth planning strategies that can be even more effective in periods of market volatility.

Below, we discuss six wealth planning strategies for volatile markets. Note that each strategy has specific potential benefits as well as drawbacks based on your individual circumstances and goals. We recommend that they are considered with investment advisors who can help identify, prioritize and quantify your life goals and, in collaboration with your tax advisors, develop a tailored financial strategy to ensure your choices are working to help you achieve those specific objectives.

Gifts of securities with depressed valuations

Using securities with depressed valuations for gifts can increase the potential value you remove from your taxable estate. These gifts can be outright or in trust, and can include tax-free gifts using the annual exclusion or lifetime exclusion. When valuations recover, the value of those gifts is enhanced.

A grantor retained annuity trust (GRAT) can be an effective strategy for giving low-value securities, particularly for those who have already used or plan to use their exemptions for other gifts. A GRAT is an irrevocable trust where you contribute appreciating assets in exchange for receiving fixed payments for a period of time. This essentially freezes the value of the assets based on their value today. A GRAT is particularly effective when the expected growth rate of the underlying assets exceeds the IRS assumed rate of return, known as the “hurdle rate.”

Roth IRA conversion

Consider converting your traditional retirement account to a Roth IRA. Lower valuations reduce the tax cost of the conversion, and doing so now can avoid higher income tax rates in future years. This can make sense as long as you pay the tax with funds outside the converted account; do not plan to take withdrawals within five years of the conversion; and have a longer time horizon before expecting to make withdrawals. (Note that there are no required minimum distributions for a Roth IRA during the lives of the account owner and their spouse.)

Substitute assets in existing trusts

Periods of volatility may be advantageous for those with existing irrevocable grantor gift trusts that allow the substitution of assets, depending on the types of assets held in the trust and their basis. Placing depressed assets with the most appreciation potential into the trust removes their future appreciation from your taxable estate and can optimize the power of the gift trust.

Harvest tax losses (and, potentially, gains)

Harvesting tax losses involves selling securities that have experienced a loss. This can offset taxes on capital gains and income this year or in future years. When executed properly, this strategy can reduce your overall tax burden. Note, however, that “wash sale” rules can nullify tax benefits if you sell an asset and then purchase the same or substantially similar assets within 30 days before or 30 days after the sale. Conversely, harvesting gains can also be a tax-efficient strategy if you have recognized losses or expect to be subject to higher tax rates in the future.

Use cash to exercise stock options

Executives holding stock options often elect to use a “cashless” exercise (selling shares received in the exercise to cover the cost of the transaction, including any tax) to eliminate the need to raise cash. However, if your options have a near-term expiration date and you expect the stock to appreciate — as might occur in a distressed market that you expect to recover — consider using cash to exercise the option and avoid selling into a down market.

Borrow funds for capital calls

If you hold alternative investments, you may face capital calls at a time when it is disadvantageous to sell assets to raise cash. Borrowing, either through an intra-family loan or from a third-party lender, can eliminate the need to sell assets until the market recovers. Lending money to family trusts facing upcoming capital calls is another way to preserve the value in the trust rather than forcing a sale into a falling market.