It may be time to consider these financial moves as interest rates shift and markets fluctuate.
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, Senior Wealth Planning Strategist for Wells Fargo Private Bank. The coronavirus outbreak has caused historic disruption of the world economy—and with the impacts of ongoing volatility in the U.S. equity markets and changing interest rates getting investors’ attention, many people have questions about their financial plans.
Hamerman says clients have asked him about risk and interest rates on existing debt and other topics, indicating an anxious state of mind. However, Hamerman says he reminds his clients that a changing economy may offer new opportunities.
Here are a few wealth management strategies to consider during this time of volatility and change.
Indicator: Historically low interest rates
Aligned with global concerns from the coronavirus pandemic, the benchmark rate set by the Federal Reserve in early 2020 is near zero. So this may be a good time to consider IRS rate–linked strategies.
Opportunity #1: Consider a grantor retained annuity trust (GRAT)
These trusts let you 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 interest rate valuation under IRS Section 7250, 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 their “bank,” 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. “AFRs 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, as of May 2020, the AFR for a short-term loan (up to three years) was 0.25%; mid-term loans (between three and nine years) are at 0.58%; and the long-term rate (loans of nine years or longer) was 1.15%.
Indicator: Ups and downs in the markets
It is important to 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 feel overwhelmed by 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
With the recent upheavals in the markets, consider re-evaluating whether you have chosen the right amount of financial risk for your portfolio. “Your risk assessment may still be accurate,” notes Hamerman. “However, if you’re not sure or if you feel that things have changed, you may need more discussion with your investment professional to keep your portfolio aligned to your goals and your risk tolerance. 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 keep a portion of your personal and business assets easily accessible. You may need to tap into those assets in a crisis—or to take advantage of an opportunity, such as 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,” Hamerman advises. It’s better to have some money available in an easy-to-liquidate, short-term investment. So if you skimped on this strategy in the past in favor of longer-term or illiquid investments, this could be your opportunity to shore things up.” Talk with your relationship manager about the best options for your personal and business strategies.
Wells Fargo & Company and its affiliates do not provide legal or tax advice. Please consult your legal and/or tax advisors to determine how this information may apply to your own situation. Whether any planned tax result is realized by you depends on the specific facts of your own situation at the time your tax return is filed.
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