Estate Planning During A Bear Market

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In April 2022, the stock market officially entered bear market territory. A bear market occurs when the market falls more than 20% from the most recent market high, in this case the 52-week market high. Many different factors have been attributed to why the market has declined, such as inflation, energy shortages, the war in Ukraine, and so on – each contributing to investor fears and investors cutting their losses. wishes to do. There will be volatility in the markets in the short term. Estate planning is a long term strategy, so what about the long term?

historicallyAfter bear markets, there are bull markets, where losses exceed recovery for those investors with the stomach to keep it out. In fact, the best growth in the market often occurs in this subsequent bear market. The result is that bear markets are an opportunity to take advantage of declining values ​​in investments to take advantage of future appreciation gifts, as well as some of the current income tax benefits.

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Gift giving can be done in a number of ways, but the most common is to give either a lump sum gift or to give a gift over time. Any type of gift can be structured as a trust. In either case, the potential gift tax payable is based on the fair market value of the assets transferred as of that day. transfer takes place. So, for example, if you paid a share of Apple
AAPL
The stock, as of January 1, 2022, would have a fair market value of $182.01, but if you gave away an equal share of Apple stock on May 24, 2022, the fair market value would be $139.325, which is 30.6% less the taxable value if you had. The stock was given on 1 January 2022. When the market recovers, a company like Apple is more likely not to lead such a recovery and even surpass the market’s overall growth in recovery. In addition to the potential increase in the value of the investment in recovery, you are also making a gift of future income, which is dividends and interest, that are paid out by the investment.

In addition to one-time gifts, you can also create split-interest gifts. This is where you make a gift, but split the interest in the gift between the current beneficiaries and the remaining beneficiaries. An example is the Grantor Retained Annuity Trust, or GRAT. GRAT is where you make a gift to a trust, but retain the right to the annuity for the duration of the trust. Depending on the amount of the annuity, the actual gift value of the GRAT can be reduced to almost zero. If the asset appreciates in value at a higher rate than the annuity pays out, the remaining beneficiaries will end up with an amount greater than the initial gift to GRAT.

Many of these split interest gifts are highly sensitive to rising interest rates, and some of these gifts such as the GRAT have been targeted for more difficult tax treatment in both the regulations in the Build Back Better Act and the proposed new tax laws. The result is that there may be a narrow window in which you can use these gifting techniques while interest rates are at historic lows, there is a bear market, and tax laws and regulations are more favorable than they should be. Chances are. Future.

Although bear markets, and rising inflation, cause a great deal of short-term pain, if you have the guts to bust it out, bear markets provide an opportunity to take these short-term lemons and make them long-term. Gifting lemonade.

Credit: www.forbes.com /

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