$2.2T dollars of Stimulus, Estate Planning and Taxes

$2.2T dollars of Stimulus, Estate Planning and Taxes

We are about 35 days post market highs and we are now seeing the first wave of unemployment numbers. That said, all pension funds, mutual funds and target date funds did their quarterly rebalancing this week and coupled with the Fed providing liquidity early this week to the bond market and a 2.2 trillion stimulus package; all this adds up to a lot of momentum upwards regardless of 3 million people losing their jobs this last week.  As we look at history keep in mind 1973/1974 bear market saw a 20% bounce, 2001/2002 had 4 rallies of 22%, 24%, 25% and 24% before falling 51% from the high.  Even 2008/2009 bear market saw a 27% run before falling 56%.   We continue to believe that there will be a much longer consumption slowdown than consensus would lead on and the second and third degree of economic risk still brings more uncertainty. Our rules-based process has led us to do 2 rebalances in this downturn, both buying more shares of equities and reducing government bonds in the process.  We continue to overweight short duration bonds and quality large cap to be defensive in protecting downside risk.  

Dow Jones this week

Our last rebalance was on Monday this week and 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 financial planning opportunities we are considering for our clients in this environment.

But first COVID-19

coronavirus death chart

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 recovery. For example, in San Diego, Rady Children’s Hospital, just started to get COVID-19 test kits this Thursday.  We believe we are still at the beginning of understanding this virus. 

Time to revisit your finances

The Stimulus provides some interesting planning opportunities.  Here are a few below, and as we read more of the stimulus plan, we are learning everyone will be impacted with a planning opportunity. Here are a few just from my initial read. 

Estate Planning

Concentrated stock – Consider doing gifts of 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 you’re 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 2 years.  Specifically, SLATs, GRATs or QPRTs – may want to revisit these strategies.  Due to a drop in value and the IRS discount rates we need to revisit these strategies with your attorneys to see if they still will remove the growth out of your estate.  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 lost harvesting- creates losses for tax purposes while 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 doesn’t make a meaningful amount of 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 assets 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 have no clue 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 please contact us at info@clientfirstcap.com and we would be