Most firms focus solely on the investment implications during downturns, but there are equally valuable opportunities on the planning side. Taking action while asset values are low can unlock powerful opportunities to grow wealth outside of your estate.
The Planning Committee has outlined nine strategies worth reviewing with your Fidelis Capital and advisory teams.
Harvesting Losses
In what situation? Market downturns can offer a chance to recognize losses and shelter future gains.How? Selling assets at a loss and replacing them with similar assets (e.g., selling Home Depot and buying Lowe’s) ensures you remain fully invested in a manner consistent with your investment strategy. There are rules associated with this strategy that require care be taken as to holding periods. Take care, especially if you are unfamiliar with them.
Roth Conversion
In what situation? Roth IRAs let your assets grow tax-deferred and be withdrawn completely income tax-free.Converting a traditional IRA to a Roth IRA – even a partial conversion if not full – means recognizing income tax now in exchange for tax-free growth down the road. This often makes sense when your future income tax rate (at the time of withdrawal) is higher than today’s rate.
How? When market values drop, it creates the opportunity to convert your traditional IRA to a Roth IRA at a reduced tax cost. Consult with your Fidelis Capital team and tax preparer to ensure the conversion is completed effectively.
Gifting Outright, in 529 Plans or in Trust
In what situation? If lifetime gifting is part of your family’s wealth plan, gifting at low market values with the potential for future growth enhances its efficiency—get tomorrow’s growth out of your estate today.How? If this makes sense for your plan, how you structure it should be carefully considered to meet your objectives and find the right balance between benefiting and protecting beneficiaries. Preserving and capturing your Generation Skipping Tax (GST) exemption could be an additional benefit in light of potential legislative changes.
Use of Leverage for Planning
In what situation? Interest rates are an important factor in many planning strategies (e.g., Grantor Retained Annuity Trusts (GRATs), intra-family loans, and some forms of philanthropic giving).Some strategies benefit from a higher interest rate environment, but many more benefit from lower rates for their valuation or leveraging impact. Very low interest rates can lead to tremendous leveraging opportunities.
Given the current economic environment, interest rate cuts are more likely, so keep an eye out for opportunities that benefit from these reductions.
How? Ensure your advisory team knows your plan for wealth transfer within your family or to charities in order to capture these opportunities.
Employee Stock Option Exercises
In what situation? Many employee stock options create ordinary taxable income (or wages) at the time they are exercised.That income is the difference between the value of the share and the price paid. The lower the value relative to the price, the lower the income.
Increases in share price after exercise are considered capital gains. If you hold that share for more than 12 months, that gain is long term and taxed at lower rates.
If your employer’s share price has declined in the current environment but the long-term outlook remains positive, exercising today could generate less ordinary/wage income. This may also convert otherwise taxable income into long-term capital gains, providing a lower overall tax burden in the future.
How? Consult with your Fidelis Capital team about the terms of any stock option plans.
Asset Swaps
In what situation? Many irrevocable trusts used in wealth transfer planning are set up so that the original owner (or grantor) still pays the income tax. Called a grantor trust, they typically include the ability to swap assets between the grantor and the trust itself. This is most effective during dips in the market.How? When markets are down, it can be advantageous for the grantor to take temporarily depreciated assets with large future appreciation potential and swap them with lower growth assets already in the irrevocable trust. This allows for growth to occur outside of the estate while reducing the tax impact.
Contribute to Retirement Plans Now
In what situation? Assets in retirement plans grow income tax-deferred. For accounts where you are making an annual contribution, doing so when the market is depreciated allows for greater purchasing power inside the plan.How? Consider accelerating 2025 contributions to your retirement plans to let the prospective market lift grow the assets income tax-deferred/tax-free.
Put Excessive HSA Cash to Work
In what situation? For Health Savings Accounts (HSAs) that have large cash accumulations, market downturns are a good opportunity to consider redeploying some of those cash positions into assets with strong appreciation potential.How? Consider putting cash to work during the dip by logging into your account and investing uninvested cash.
Revisit Allocation in 529 Accounts
In what situation? It’s a good time to review the cash and fixed-income allocation relative to equities in a 529 account. These accounts typically become more conservative in their investment style as educational expenses approach. That automatic adjustment may or may not be in line with your expected use of the funds providing an opportunity to shift some funds back into depreciated markets to capture potential upside from here.How? It’s a good time to rethink allocation and adjust as appropriate. Log into your account, check the allocation, discuss with your advisory team and make appropriate adjustments.
Final Thoughts
We are speaking with many of you about how to capitalize on market volatility, and it's important to remember that opportunities aren't limited to the investing side alone.While the focus tends to be on market moves and portfolio adjustments during downturns, there are also powerful planning strategies that can create long-term benefits.
If you have any questions or would like to take action on one of the above strategies, please do not hesitate to reach out to a member of your Fidelis Capital team.
