Wealth Advisory & Planning
March 04, 2022
Wealth Planning: Prepare for Uncertainty, Capitalize on Volatility
Preparing for uncertainty and looking for opportunities to capitalize on market volatility have never been more appropriate than now in the current environment. With both economic and market factors affecting wealth planning, the present is a good time to reassess your wealth planning goals for 2022 and beyond.
The question of how inflation and rising interest rates could impact wealth plans is top of mind for just about everyone. Inflation spikes over the past year have significantly increased certain living expenses. Many of these expenses will only increase from this new, higher level, making it vital to take a closer look at any life transition decisions this year or next. For instance, if you are planning to retire later this year or in 2023, you should reexamine the new costs of your fixed and discretionary expenses.
We suggest reanalyzing asset sufficiency to cover retirement years, given these costly spending levels and higher borrowing costs. For Glenmede clients, an effective way to test this sufficiency is by running a comprehensive Goals-Based Wealth Review. The review examines the probability of maintaining lifestyle goals during heightened market volatility, including inflation and interest rate fluctuations.
Despite recent pullbacks, markets are still relatively expensive, and that may impact some wealth planning techniques. However, most of the planning techniques we use focus on the long term. If market performance in 2022 is muted or more volatile compared to longer-term averages, do not be dissuaded from embarking on planning today. Often, waiting for a market correction to occur to make gifts into long-term trusts yields little benefit. Generally, the longer the planning horizon or the duration of a planning technique, the less of an impact an expensive market will have on the technique’s success.
However, market volatility can provide some near-term opportunities. With a market or asset class correction, planning techniques such as Roth IRA conversions or grantor retained annuity trusts (GRATs) could be deployed to take advantage of lower asset values and reap the rewards of a market rebound.
Favorable estate planning environment
After spending the past two years analyzing and preparing for tax legislation aimed at curtailing estate planning techniques and raising income tax rates, we find ourselves in a familiar and favorable tax planning environment. It now appears the current lifetime gift and estate tax exemption will not be reduced until the end of 2025. Given this extended opportunity, we believe it is important to not become complacent and to act this year.
Knowing that talks of tax legislation will likely be renewed, we continue to watch for any proposed changes to the tax laws. Of special concern is the potential surtax on trust income. The original surtax proposals of 2021 had relatively low thresholds at which the surtax would be levied. The 5% surtax would have kicked in on the first dollar of trust income over $200,000, and the additional 3% surtax would have been levied on the first dollar over $500,000. While trustees can mitigate some of this surtax by pushing income out to current beneficiaries, this is not always an option due to other, nontax issues.
Another complicating factor for trustees is that capital gains within a trust are generally attributable to principal and therefore taxed at the trust level. Given the tax uncertainty, should you still be using trusts for your estate planning? The simple answer is yes. Trusts provide many nontax benefits, such as creditor and divorce protection, fiduciary oversight, guidance for beneficiaries and preservation of assets for future generations. However, if you are creating a new trust and worried about current income taxes, consider a grantor trust. This type of trust is specifically drafted in a way that would cause the income of the trust to be included on the grantor’s personal income tax return. This trust design can result in substantial tax savings for the trust and ultimately pass more assets to future heirs and future generations.
Uncertainty surrounding tax law changes should not prevent you from being proactive in your current income tax planning. We note three areas of focus:
- Manage your portfolio while being tax-aware:
- Create a capital gains budget for appreciated portfolios.
- Utilize exchange funds, options or gifting to complement outright asset sales when managing a concentrated or low-basis portfolio.
- Consider converting existing IRAs to Roth IRAs to diversify tax treatment during retirement and eventually for your heirs.
- Consider family circumstances:
- Shift income where possible to generations in lower tax brackets.
- Make trust distributions to beneficiaries with lower income tax rates.
- Meld philanthropic goals and tax planning:
- Plan for tax-efficient charitable giving by using appreciated securities.
- If you are over 70 ½, utilize qualified charitable distributions from IRAs.
- Use donor-advised funds to better time income tax charitable deductions.
- Consider charitable lead or remainder trusts when attempting to meet both legacy and philanthropic goals.
Take this opportunity to make sure you understand your estate plan. Review everything from beneficiary designations to the executors and trustees named in your estate planning documents. If significant changes have taken place in your life, consider rerunning your Goals-Based Wealth Review. Now is the time to prepare for uncertainty ahead and capitalize on current planning opportunities.
This presentation is intended to provide a review of issues or topics of possible interest to Glenmede Trust Company clients and friends and is not intended as investment, tax or legal advice. It contains Glenmede’s opinions, which may change after the date of publication. Information gathered from third-party sources is assumed reliable but is not guaranteed. No outcome, including performance or tax consequences, is guaranteed, due to various risks and uncertainties. Clients are encouraged to discuss anything they see here of interest with their tax advisor, attorney or Glenmede Relationship Manager.