Bear Markets and Estate Planning

Earlier in 2022, the stock market entered what is referred to as a bear market, which happens when the market drops more than 20% lower than a recent high. Financial experts have cited various reasons why the market has declined including, but not limited to, the war between Russia and Ukraine, energy shortages, and inflation. Each of these elements has encouraged investors to avoid losses. The market’s volatility will unfortunately remain for some time, which might make you wonder how this type of market could impact our estate planning. 

Bear and Bull Markets

Bear markets are often followed by bull markets, in which losses are recovered. The most substantial growth in the stock market often occurs in what follows a bear market. As a result, people who want to make the most of estate planning should realize that bear markets are an ideal time to make the most of the decline in investment values to make the most of gifts that will be appreciated in the future and to take advantage of existing income tax benefits.

Do Not Look Past Gifting

Gifting can be performed in countless ways. The most common type of gifting, however, is to either make an outright gift or to pass on a gift over a period. Either method of gifting can be utilized through a trust. In either situation, the potential gift tax that will be placed on the amount is decided by the Fair Market Value of assets transferred on the day that the transfer occurred. When recovery occurs in the market, companies like Apple are more likely than others not to lead in a market recovery and even surpass the overall market growth in recovery. In addition to the probable growth in investment values during recovery, a person also makes a gift of future income including dividends as well as interest that are paid by the investment.

Consider Split-Interest Gifts

Besides outright gifts, you should also consider split-interest gifts where you make a gift although the split in interest exists in the gift between existing beneficiaries and remainder beneficiaries. One type of split-interest gift is a grantor retained annuity trust, in which a person makes a gift to a trust but keeps the right to annuity on the trust’s terms. Based on the amount of annuity, the actual value of the gifts of a grantor retained annuity trust could be lowered to close to zero. If assets increase in value at a higher rate than the annuity’s payout, the remainder beneficiaries will end up with an amount greater than the initial gift made to the grantor retained annuity trust. Many split-interest gifts are susceptible to rising interest rates and some gifts including grantor retained annuity trusts have been targeted for more rigorous tax treatment in regulations and proposed tax laws than many other recovery regulations.

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