6 Strategies: Financial and Tax Planning During Volatile Times
Wealth Architects put together a live webinar to address these topics with our clients and partners as part of our Wealthier Life Series. I hosted this discussion, featuring Mark T. Johnsen, CEO of Wealth Architects, and Martin Behn, Shareholder and Co-Chair of Hopkins & Carley’s Family Wealth & Tax Planning Practice.
Below are six key takeaways from our conversation.
- Emotions and investing
Don’t pull your investments in a panic every time there’s a down market. It’s in these challenging environments that your loyalty to your financial plan is put to the test. Stay invested and keep investing. It’s important to remain rational, keep the faith and stay consistent with the fundamentals of financial planning.
Market fluctuation and timing is hard to predict. Wealth Architects believes in financial planning with a steady and long-term gaze. Turbulent markets are inevitable, but our behaviors don’t have to mimic that.
The pull to switch strategies is understandable. Fight or flight mode can kick in. But the investors who remain steady tend to get better returns in the end than those who change course with their emotions. Having a trusted team and a portfolio built to mitigate against adverse market climates can relieve stress and help counteract the instinct to take action.
- FDIC cash insurance
Individuals with cash in an FDIC-insured bank are insured up to $250,000 for each account ownership category . If that institution were to collapse, the account-holder is guaranteed to receive $250,000 of their cash deposits back. What many people don’t know is that this amount is per depositor, per insured bank.
This means that if you were to open a joint account with another depositor, your insurance would cover your cash up to $500,000. You can repeat this process across multiple insured banks to get as much of your cash insured as possible.
Another option for families is revocable trusts, where FDIC insurance is based on the number of beneficiaries. You can name yourself and four immediate family members as insured depositors for a maximum of $1.25m (as of January 2023) covered by insurance. The coverage becomes more complicated when the number of beneficiaries exceeds five.
Businesses (especially those with high cash needs) can also distribute their cash among multiple institutions using IntraFi Network banks. IntraFi Network Deposits is a banking network that allows customers to deposit more than $250,000 and have the funds be FDIC-insured. There is typically a fee associated in this case, but you may find it worth it to hedge your risks and get more insurance coverage for your business. Learn more about IntraFi Network Deposits here.
- Protected assets and portfolio rebalancing
Certain investment vehicles are lower risk because they are fully protected in the event of a bank custodian failing. When you own a stock, bond, mutual fund or money market fund, you hold the right to those assets and will not lose that right. These instruments are segregated and undergo auditing requirements that keep them protected. Having that type of safety net in place can be a huge source of comfort.
Risk and return are always related, so the tradeoff of these lower risk options is likely more modest returns. A common practice is to build portfolios with target asset allocation across different investment and risk categories so it’s more balanced and viable. We manage those assets with regular portfolio rebalancing, such as selling off the assets that have done really well and buying more low performing assets.
- Trusts and gifting
In this era where asset values are down but interest rates are going up, contributing to a trust can be a great strategy. Martin discussed three trusts to consider exploring with a professional advisor:
Charitable Remainder Trust (CRT): A CRT is an irrevocable trust that generates a potential income stream for the donor, as the donor to the CRT, or other beneficiaries, with the remainder of the donated assets going to charity or charities. The donors get an upfront partial tax deduction based on the assets that will pass to charitable beneficiaries (this is determined using a formula to create the CRT). A CRT can make sense in a rising interest rate environment because a higher rate can potentially provide a greater charitable deduction to the donor.
Grantor Retained Annuity Trusts (GRAT): Donors put assets into a GRAT over a term of 2-5 years. You pay yourself back all of the principle you put in, plus the hurdle rate (interest rate). If the assets appreciate beyond the hurdle rate over the course of that term, that net value will go to your beneficiaries free of transfer tax.
Qualified Personal Residence Trust (QPRT): A QPRT may appeal to homeowners who want to keep their property for future generations. Grantors decide how many years their home stays in the trust until transferring to their beneficiaries. The initial transfer to the QPRT is a taxable gift of the value of the remainder interest, calculated using the 7520 rate. The higher the 7520 rate, the higher the value of the grantor’s right to use the residence as his or her own during the term of years, and the lower the value of the gift of the future remainder interest. As rates increase, the taxable gift decreases.
- Roth IRA conversions
There are two types of IRAs. A traditional IRA is funded with pre-tax dollars and your money grows tax-deferred. You must take your money out at a specific age (whether or not you need it), at which point it gets taxed. A Roth IRA is funded with after-tax dollars and that money remains tax-exempt as it grows and when you take a withdrawal. Unlike the traditional IRA, there is no Required Minimum Distribution (as of this writing).
If you own stock that’s taken a big hit but you believe it will rebound, you might consider a Roth IRA conversion. You can take those shares out of your traditional IRA account while they’re theoretically at a low stock value, then put them into a Roth IRA. When the value (hopefully) rises again, that growth is tax-exempt. This can be a really valuable strategy when markets are down.
Under the current tax regime, Roth IRAs can provide advantages for estate planning. The tax paid on a Roth IRA conversion during the life of the owner can lower the owner’s taxable estate while also leaving a tax-free gift to future beneficiaries.
- Layoffs and equity awards
If you’ve been affected by the recent waves of layoffs in Silicon Valley, or are concerned you might be, reach out to your team of professional advisors right away so you have as much time as possible to prepare and best position yourself. They can help you evaluate cash flow, COBRA, health insurance, retirement plan rollovers, taxes and stock purchase considerations.
It’s common for companies in this area to provide employees with equity awards as part of their compensation. Not everyone realizes that you don’t have to take the first exit package your company offers you, even amid layoffs. So much is negotiable: the acceleration of unvested shares, your post-termination exercise window, restrictions around selling your equity, and other logistics regarding your awards.
Put the time into really understanding your equity awards – it could be one of the most important financial decisions you make.
“If the seas were always calm, we would never build a better boat.”
As we wrapped up our discussion, Mark shared a card he received from a client that read: “If the seas were always calm, we would never build a better boat.” It’s a fitting message to think about right now. Times of crisis and adversity can actually serve us. When the market reveals to us its weaknesses, we gain better regulation, we see financial innovation and we are reminded that we always have something more to learn.
If you are not a current client of Wealth Architects and would like to speak to one of our advisors about how we can help you reach your financial and personal goals, contact us here. We look forward to connecting with you.
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