Updated June 2018 — Feeling a bit uneasy about the current economy’s impact on your family’s wealth-building—or wealth-maintaining—strategies? That’s only natural, says William Hamerman, Wealth Planning Strategist for Wells Fargo Private Bank. With the impacts of 2017 tax reform, volatility in the U.S. equity markets, and rising interest rates getting investors’ attention, many have questions about their financial plans, he says.
Recently, Hamerman relates, clients have posed questions to him on topics such as risk and interest rates on existing debt, indicating an anxious state of mind. However, Hamerman says he reminds his clients that a changing economy isn’t just something to worry about—it also offers new opportunities to consider.
“While much of the conversation on tax reform has centered around income tax changes, increased estate exemptions have opened a window of opportunity to reconsider your estate plan in light of your current cash flow and make any desired changes,” he explains.
Here are a few wealth management strategies to consider during this time of volatility and change:
Trigger: Rising interest rates
Keep in mind that interest increases will likely phase in slowly and steadily over the coming months and years, so this may still be an ideal time to take advantage of reasonably low rates.
Opportunity #1: Consider a Grantor Retained Annuity Trust (GRAT)
These trusts allow you to shift assets to other family members, possibly without incurring gift tax. In a GRAT, assets are placed into the trust, and the grantor collects an annuity payment every year. Hamerman explains that in general, if the assets within a GRAT increase in value more than the currently very low IRS interest rate valuation, the assets from the trust may be able to be transferred without incurring the gift tax, provided the trust expires before the grantor passes away. Your fiduciary specialist or wealth planner can help you determine whether a GRAT makes sense in your situation.
Opportunity #2: Provide a family loan
If your adult child needs a loan to buy a home or start a business, consider becoming the Bank of Mom and Dad, suggests Hamerman. That way, repayments and interest remain within your family, your child may be able to get a better rate, and you get the benefit of at least a small amount of interest.
The IRS requires you to charge a minimum interest rate (Applicable Federal Rate, or AFR) if you don’t want the loan to be considered a gift. “While AFRs have increased recently, they are still historically low such that you don’t have to charge much interest right now to maintain a ‘safe harbor’ from the IRS with family loans,” says Hamerman. For instance, the AFR for a short-term loan (0–3 years) is currently is 2.34 percent, mid-term loans are at 2.86 percent, while long-term rates (loans nine years or longer) are 3.05 percent.
Trigger: Ups and downs in the stock market
It is important to stay up to date and not allow outdated perceptions to steer your hand going forward as the market can change quickly. Hamerman encourages clients to remember the following: “Stocks are the only real investment in which you get a second-by-second price valuation,” he says. “You don’t get that on your house or your business partnership.” In other words, it’s easy to over-react to the day-to-day or even hour-to-hour movements of the stock market when you’re flooded with constant updates from a variety of sources each day.
Opportunity #1: Test your risk tolerance
When you get a real taste for how quickly the market can go up and down, you can realistically decide if you have chosen the right amount of financial risk for your portfolio. “Chances are good that your risk assessment is still accurate,” notes Hamerman. “However, if you’re not sure, you may need more information and education from your investment professional. That way, you can feel more comfortable with your choices during both up and down markets.”
Opportunity #2: Create a liquidity cushion
It’s always important to have a small portion of your personal and business assets easily accessible. You may need to be able to access them in a crisis—or during a happy event, like the unexpected chance to acquire a competitor’s business.
“You never want to be forced to sell long-term investments at an inopportune time to raise cash. It’s better to have some money available in an easy-to-liquidate, short-term investment,” Hamerman advises. “So if you skimped on this strategy in the past in favor of longer-term or illiquid investments, this is your opportunity to shore things up. Talk with your relationship manager about the best options for your personal and business cushions.
Trigger: Tax changes
A new year almost always means adjustments to tax laws. Hamerman outlines a few wealth management options related to changes in 2016.
Opportunity #1: Make qualified charitable distributions (QCDs) from your Individual Retirement Accounts (IRAs)
This once-temporary option to make gifts without having the distribution count as taxable income has now been made permanent, notes Hamerman. Ask your tax professional if it makes sense to gift up to $100,000 of your IRA required minimum distributions (RMDs) directly to your favorite nonprofit(s) without affecting your taxable income.
Opportunity #2: Take advantage of bonus business depreciation
For a short time, business owners can take up to 100 percent of the depreciation on new capital equipment purchases in the first year, rather than over a longer period. This option will end in 2023. If you’re a business owner, Hamerman suggests talking to your tax professional about possibly accelerating purchases of large equipment before 2023. You may also want to review your cash flow available for taxes in subsequent years.
“Also, the 2017 Tax Cuts and Job Act current tax law is subject to change under a new administration,” Hamerman notes, “so keep be sure to work with your tax advisors to stay on top of the changes that apply to you.”