As we continue to navigate uncharted territory in terms of market volatility, the role of the adviser has perhaps never been more critical to a client’s future.
A great adviser can cement his or her worth during this history-making moment by providing reassurance and focusing on the emerging opportunities for clients. For high-net-worth individuals, questions about cash flow and interest rates loom largest both as threats and chances to capitalize on their wealth: How will I cover my expenses? How is my family affected? Should I liquidate my investments?
If history repeats itself, the economy will eventually bounce back and provide prolific openings for the well-prepared. Here are a few proven strategies advisers are using amid the current market turbulence to help clients stay on their path to a successful retirement:
1. Annual exclusion gifting
Many advisers right now are asking clients: If you could give your children money to invest now before the markets turn around, would you?
Utilizing an annual exclusion amount can assist here. It allows an individual to transfer money up to a certain threshold ($15,000 in 2020) each year at any time and in any increment with no tax consequences. This is typically used toward the end of the tax year, though clients may want to consider giving a portion of the amount now while volatility is high, which, in effect, could make their gift worth more over time if it's invested. Helping loved ones afford private medical care could also be a motivation, as well as simply reducing the total estate value.
Advisers are reminding clients they can gift to as many individuals and parties as they’d like and itemize gifts to qualified tax-exempt organizations.
Read more about
tax implications of gifting stock.
2. Grantor retained annuity trusts
With future appreciation in mind, advisers can help clients consider locking in the value of an asset now, which could mean transferring the growth to beneficiaries tax-free and also generating cash flow.
Grantor retained annuity trusts, popularized by the Walton family, are powerful when Section 7520 interest rates used by the IRS are low (they're closely tied to the Federal Reserve's rate and they’ve never been this low), and assets have potential to flourish in the near term. The trusts involve a grantor gifting an asset, such as stock, to a GRAT for a term of years with the right to receive a predetermined annuity from the trust throughout that term.
The annuity is calculated by applying the Section 7520 rate to the fair market value of the gift. For estate purposes, the taxable gift amount is the value of the gift on the transfer date subtracted from the grantor's retained annuity interest. Any appreciation over the Section 7520 rate is passed onto a client’s beneficiaries, tax-free, after the GRAT term ends. Advisers can help clients to structure the annuity where the taxable gift is $0 and transfer a substantial amount to beneficiaries with no tax impact.
Our current market environment presents an opportunity to exploit
low rates and market volatility. Will the gifted assets generate a return equal to or more than the Section 7520 rate over time? If so, and a client would like to receive income and reduce their overall estate value, while providing a tax-free gift to beneficiaries in the meantime, a GRAT might be great.
[More: The Trump family used this strategy to save on taxes]
3. Borrowing from a life insurance policy
Reliance on income-producing assets could leave investors in a bind for the foreseeable future. Planning for large capital expenditures, such as capital calls and educational costs, can be mitigated by borrowing money from a universal or whole life insurance policy after accruing a sizable cash-value amount.
Unlike a typical bank loan, there’s no lengthy application process, rates are traditionally lower, and clients have the option to repay the loan on their own schedule or not at all, though if they don't, they risk a reduced death benefit or sacrificing the policy. The loan money does not come from a client’s cash-value amount, which means their loan repayment can come out of their cash value if they choose.
If clients elect to raise capital to invest in the markets by borrowing from their policies, they are betting on market growth that outpaces the insurer’s interest rate – similar to a GRAT's growth outpacing the 7520 rate.
Advisers tell clients that borrowing from a policy for expenditures shouldn’t be at the top of their list, though selling securities in down markets is not desirable and investors are prone to loss avoidance. However, opting for the former strategy takes advantage of potentially lower interest rates and bets that a market rebound will produce enough income to help repay the loan.
[More: Cash-value life insurance provides a safe harbor in the current storm]
4) Refinancing debt
HNW clients often have a portion of their net worth tied to ownership of a business. Given the Fed’s recent interest rate cuts, now is a great time to explore refinancing business and personal debt.
Aside from the lower rates, refinancing can lengthen the term of a loan and decrease a borrower's payment amounts. Conversely, clients can keep their payments the same and borrow more capital due to the lower rates. Both provide an opportunity to take advantage of beneficial market conditions that can make a large impact in the longer term.
These are a few of the techniques many advisers are using to guide their HNW clients through these unprecedented conditions. As fear has driven global markets over the past few weeks, solid financial advice has become more valuable than ever.
Edmond Walters is the founder and CEO of Apprise Labs, which provides collaborative presentation tools for financial advisers to use with their clients.
