Finding the Silver Lining: 8 Wealth Planning Opportunities

If you’re like me, you’ve been seeking out the silver linings in these unprecedented times. Albert Einstein said it most succinctly: “In the middle of difficulty lies opportunity.” And that’s certainly true for your finances. Markets may be volatile, your plans for the future may be uncertain, but there are wealth planning opportunities to be had.

Consider these eight silver lining opportunities, which we assess for each of our clients, to improve your wealth plan.

1. Avoid a future pit in your stomach: have cash on hand.

You’ve heard the phrase “cash is king,” and nothing reinforces that more than seeing your portfolio take a dive. If you know you have a need for funds in the next 12-18 months—say for taxes, home improvements, or retirement—then have that money set aside as cash. Don’t assume you can just take it from your portfolio when you need it, because, as we’ve seen, market conditions can change quickly and you want to avoid withdrawing money from your portfolio when your accounts are down.

2. Revisit your risk tolerance.

When a market pullback is hypothetical, it can be easy to think you are comfortable with high levels of risk and volatility. It’s not so easy when that market pullback is real. Did the market dip in December 2018 or the unprecedented sell-off in March 2020 make you question your allocation or think about selling? If the answer is yes, then you should revisit how much risk you’re actually comfortable taking, as well as how much risk you really need to take to achieve your goals—it may not be as much as you think.

3. Consider a Roth conversion.

If you’re considering converting a portion of your tax-deferred IRA money to after-tax Roth IRA money, it could be a good time to do so during a market drop, especially if you’re considering converting a large portion of your IRA. Essentially, converting while an account value is down creates more tax-free growth when markets recover. Check out “Three Reasons It’s Time to Reconsider Roth Conversions” for more wealth planning insight into why you many want to consider a Roth conversion.

4. Max-out your tax-deferred accounts when the market is down.

Most of us who have employer-sponsored tax-deferral plans through work—primarily retirement or health savings accounts—tend to make equal contributions each month, but when the market takes a big hit, it’s a smart time to see if you can “front-load” your contributions for the remainder of the year. Doing so will give you more tax-deferred growth when markets recover. (Though, be mindful of your employer’s rules around matching contributions to make sure that front-loading an account won’t make you miss out on any matches.) If you’re making contributions to an IRA account for 2020, max-out that contribution when the market is down as well.

5. Refinance your loans.

Interest rates have been declining for the last few years, so you may have already taken advantage of refinancing your loans and/or mortgage, but if not, now is a great time to consider it—mortgage rates are at historic lows. While you will pay closing costs to refinance a mortgage, if you haven’t revisited your rate in a while your monthly savings could be significant.

6. Check the beneficiaries on your retirement accounts.

The SECURE Act, signed into law in December 2019, changed the rules on how long non-spouse beneficiaries have to take money out of an inherited IRA, shortening that period from the beneficiary’s lifetime to ten years. Concerned about your child having to take out a large retirement distribution? Consider this idea (of course within the broader context of your overall estate plan): rather than listing your spouse as 100% primary beneficiary and your child as 100% secondary beneficiary, list your spouse and your child each as 50% primary beneficiaries; this way your child will have two 10-year periods to take their required minimum distributions from the account, once when they inherit the IRA from you and then again when they inherit the remaining IRA balance from your spouse.

7. Take a fresh look at your estate documents.

Why not use all this extra time at home to refresh your estate documents?! (I know, exactly what you want to do—and parents with young children at home are definitely rolling their eyes at the thought of “extra time.”) If you don’t have estate documents or your documents haven’t been updated in a long time, this should be reason enough to reach out to your attorney. (Call us if you need a recommendation.) But, in particular, if you have a trust listed as a beneficiary of your retirement account, your attorney should review your trust language. For instance, if your trust is written as a conduit trust, you could be unintentionally creating problems for your beneficiaries in light of changes made through the SECURE Act, potentially forcing them to take their full distribution from a retirement account in one year rather than stretching out their required distribution over ten years.

8. Consider a GRT.

A Grantor Retained Trust (GRT) is a type of trust used to transfer assets from one family member to another over time while giving the grantor an income stream during the trust’s term. The trust allows you to transfer assets at a discounted gift tax value and removes future appreciation of those assets from your estate. So why is now the time to consider setting up a GRT? Because the Section 7520 rate is at an all-time low of 0.60% (as of June 2020). The IRS uses this rate to determine the value of the income stream you receive during the trust’s term, which then determines the value of the gift being transferred to your heirs. Essentially, because the 7520 rate is so low, you can transfer a large amount of assets out of your estate while using a smaller amount of your lifetime gift tax exemption. There are a lot of important wealth planning considerations with GRTs—for example, transfers to a GRT are irrevocable and, to be successful, you must outlive the term of the GRT—but it could be a beneficial strategy if you’re facing a potentially large estate tax bill.

A true Private Wealth Design is co-created. Masterminded. Crafted. Envisioned. At Monument, we create yours based on honest, thoughtful, considered conversation, and it’s as much a result of design thinking as it is logical thinking. The way we see it, this is creative work. That’s because there is no linear answer or checklist to adequately answer the question “what do you want your life to be?”

So, give us a call and let’s talk about whether any of these wealth planning opportunities could be right for you.