$2.2T Dollars of Stimulus, Estate Planning and Taxes

We are about 35 days post market highs and are now seeing the first unemployment numbers. All pension funds, mutual funds and target date funds did their quarterly rebalancing this week. Coupled with the Fed providing liquidity early this week to the bond market, and $2.2 trillion in stimulus money, this is creating upward momentum, despite three millions jobs lost this last week. In retrospect, the 1973/1974 bear market saw a 20% bounce, 2001/2002 had four rallies of 22%, 24%, 25%, and 24% before falling 51% from the high. Even the 2008/2009 bear market saw a 27% run before falling 56%. 

We continue to believe that there will be a longer than anticipated slowdown of consumption than consensus would lead on. The second and third degree of economic risk still brings more uncertainty. Our rules-based process has led us to do two rebalances in this downturn, both of which involve buying more shares of equities and reducing government bonds in the process. We continue to overweigh short duration bonds and quality large caps to be defensive in protecting downside risk.

*Dow Jones this week

Our last rebalance was on Monday this week, right after the Fed stepped in and started buying bonds and providing liquidity to the markets. The Fed also went a step further and took action to move into corporate debt purchases via Blackrock ETF LQD. Yes - Wall St. is in charge of buying corporate bonds for the government. 

And yes, we own some of this fund in most of our models. Which immediately caused this and all other fixed income holding to bounce back about 60% of losses in bonds.  This week we are going to dive into the financial planning and estate planning opportunities we are considering for our clients in this environment.

But first, a COVID-19 update

*COVID-19 deaths across various countries

We are passing 100,000 cases and it doesn’t look like we are slowing down anytime soon. It makes it hard to have an economic timeline to normal life when the virus continues to grow and the number of ventilators available doesn’t keep pace. The President on Friday invoked the Defense Production Act to help boost supply of ventilators. I believe we still don’t have accurate numbers on the death rate nor recovery rate. A number of people are not being counted and are labeled as respiratory failure since testing is still not wide and frequently enough.  And a number of people are not counted as recovered. For example, in San Diego, Rady Children’s Hospital only just started to receive COVID-19 testing kits this Thursday. We are only just beginning to understand this virus.

Time to revisit your finances

The Stimulus provides some interesting estate planning opportunities. I’ve listed a few below as well as its implications on investments and taxes. As we continue to read more of the stimulus plan, we are learning everyone will be impacted with a planning opportunity. 

Estate Planning

Concentrated stock - Consider gifting company stock vs cash while values are suppressed. This may mean filing a 709 Gift Tax Form. The purpose of this would be to get future gains into your beneficiaries’ side of the balance sheets. If your beneficiaries find themselves without employment there could potentially be 0% capital gains rate tax. 

Roth Conversions - With the Secure Act, most non-spousal beneficiaries will have 10 years to distribute IRAs. However, if you have room in your current tax bracket, the ability to do a Roth Conversion will provide a surviving spouse and other beneficiaries tax free assets. 

Income Beneficiaries from IRA accounts - Normally a 5-year withdrawal process, or 10-year under the new Secure Act, will all get one extra year. Most people will look to not take a distribution this year but it may be more advantageous to take distributions over a longer period than to skip a year.

Most estate planning strategies for individuals above the exemption amounts will need to be revisited if they were implemented in the last two years. Specifically, SLATs, GRATs or QPRTs. Due to a drop in value and the IRS discount rates, we need to revisit these strategies with your attorney’s to see if they still will remove the growth out of your estate. The most likely result will be to undo these strategies and redo them with a lower cost basis being added back into the specific trust. This will reset the basis of assets to current levels and provide future gains into the beneficiaries’ side of the balance sheet.

Income Taxes

Tax loss harvesting - creates losses for tax purposes with ability to rebalance and/or take gains elsewhere

If you are taking RMD - There is no RMD for 2020. If you have already taken withdrawals, there is a 60 day look back to undo them. If IRA income does not contribute significantly to your income you can stop taking in 2020 and look at rebalancing taxable accounts at reduced short-term and long-term capital gains rates. 

Roth Conversions - Again with values of shares down, you can convert to Roth IRAs now and pay taxes.  Then, when asset values rebound, all the growth will be tax free. Again, depending on how much space you have in your current tax bracket. 

Retiring early and if you or your spouse or a dependent are affected by COVID-19 - Individuals will be permitted to take a withdrawal from their retirement accounts (IRAs, 401(k)s, etc.) of up to $100,000, without paying the usual early-withdrawal penalty. With the potential to spread the taxable income over 3 years, 2020, 2021, and 2022. I do not know how the IRS will enforce this especially when people are being told to self-quarantine and not go to hospitals. Also, distributions from 401(k), 403(b) and 457 plans are not subject to the 20% mandatory withholdings.

Plan and understand what you own

I recently had the opportunity to talk to a client I used to work with at my previous firm.  For a moderate conservative model, we found two things we felt were quite alarming with their current investment. One was that 70% of the client’s bonds were ‘BBB’ and 35% of their equities were in energy.  As you can imagine they had significant negative volatility. It is important to understand downside risk in the assets you own. If you would like a review of your current holdings or have questions about how the current situations affected taxes and investments, contact us through our website or give us a call at 1-800-310-2828. We’d be happy to take a look and answer your questions!