Wise Use of a Volatile Portfolio

by Timothy P. Vick, Director of Research, Sanibel Captiva Trust Company

The intense volatility we’ve experienced in the market certainly raises, for many of you, near-term issues of asset allocation, budgeting, and maintaining proper levels of income. The price declines also bring to the fore several tax and estate planning issues. For example, is it the right time to harvest capital gains? What do you do now with stocks that have appreciated for 20 years? Are there tactical advantages to taking losses? Can you exploit the market’s decline to assist your estate planning? For many clients, we’ve already found viable options for repositioning their portfolios for future growth while enhancing their tax and estate situations.

Certainly, this is a time to review your overall tax situation and the unrealized gains and losses that may exist within your portfolio. Before the market’s decline, most investors held assets that had appreciated substantially since 2009, and the unrealized gains may have seemed too large to deal with. Quickly, however, some gains have turned to unrealized losses. Likely, there are now opportunities to upgrade the quality of your portfolio and finally harvest gains on long-held assets, while offsetting those gains by selling lower-quality assets for losses.

You may also need to “bank” capital losses outright in anticipation of selling an appreciated asset later. If so, use the market’s decline to generate the desired amount of losses. Finally, investors can consider selling assets now to intentionally generate tax losses, then buying those assets back after 31 days to reestablish the position at a lower price.

For those investors looking to shelter a portion of their portfolio from income taxes, a declining market offers an opportunity to fund a ROTH IRA with lower tax consequences. Currently, you may be holding substantial assets in an IRA and taking required minimum distributions (RMDs) that are taxed as ordinary income. With stock prices down, consider converting some of the IRA assets into a ROTH. Converting assets in a down market reduces the upfront taxes on the conversion, and lets those assets compound permanently tax free for you and heirs.

Charitable Trusts are yet another way to deal with an appreciated asset that has lost its appeal and no longer serves your needs. Say you have owned highly appreciated stocks for 30 years that you are loath to sell for a gain. In such cases, you can place the stocks in a Charitable Trust to benefit your favorite non-profits. By doing so, you can quickly sell the stocks – tax free – within the Trust and diversify the account more to your liking. The Trust will distribute income to you (a minimum of 5% per year) until your death. At death, the remaining assets are donated directly to chosen charities. You get an up-front deduction for the value of the donated stocks (based on a complicated IRS formula), and the opportunity to enjoy income from a new portfolio created for your current living needs.

Investors who may need to cap the value of their estate, and yet believe their investments can rebound in the coming years, often create a Grantor Retained Annuity Trust, or GRAT. With a GRAT, the investor essentially places low-cost basis securities into an Irrevocable Trust for a fixed period (usually 2-10 years). Over that time, the Grantor gets a stream of income from the Trust. When the Trust terminates, the assets transfer to beneficiaries. If the assets rose in value while the Trust was in effect, the appreciation gets pushed to the beneficiaries and excluded from the Grantor’s estate. GRATs are most effective when a long-held asset may have temporarily fallen in value and the owner believes there is still significant appreciation potential. Gift taxes are paid based on the value of the asset when the GRAT was created. The chief caveat is that the Grantor must outlive the term of the GRAT to get the estate tax benefit.

We encourage you to sit down with your investment, tax and estate advisors to see if these strategies can make a difference for you now.

The Sanibel Captiva Trust Company is an independent trust company with $2.5 billion in assets under management that provides family office and wealth management services, including investment management, trust administration and financial counsel to high net worth individuals, families, businesses, foundations and endowments. Founded in 2001 as a state-chartered independent trust company, the firm is focused on wealth management services that are absolute-return oriented and performance driven. Each portfolio is separately managed and customized specifically to the client’s yield and cash-flow requirements. The Naples Trust Company and The Tampa Bay Trust Company are divisions of The Sanibel Captiva Trust Company. Offices in Sanibel-Captiva, Naples, Tampa, Belleair Bluffs-Clearwater and Tarpon Springs. http://www.sancaptrustco.com

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