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- [00:00]
A
Foreign what is up? And welcome back everyone to another episode of the Practical Planner podcast. I'm your host, Thomas Coldman. Here with me, Dave on Dave, how you doing today, man?
- [00:18]
B
Great. How you doing?
- [00:20]
A
I'm good, man. Well, I mean, I'm good a little, I would say, just desensitized everything going on in the markets today. So I'm really excited though to talk about the topic today. So obviously, you know, topic today is going to be all about, you know, what to think about estate planning wise while markets are down. But I think for all the listeners to know, I mean, we're recording on the 9th and we're recording about 10 minutes after Trump actually decided on this 90 day tariff pause. So this last week has obviously been very volatile, very weird, right? We saw, you know, three trading days in a row that, you know, I think top three all time fastest decline in history. We saw a fake news story on the pause. Markets went up about 7% in 30 minutes, found out it was fake. You know, markets went back down today, found out now it's actually true. And in that period of time, in the last 10 to 30 minutes now we have QQQ up 10% S and P500 up almost 8%. Bitcoin up almost 7%. So we're seeing the markets almost respond like crypto at this point and, you know, we have no idea what the markets are going to look like next week when this happens. But I don't think that changes this topic and how we should be educating advisors about what to think about when markets are down and because down markets create different opportunities. And you know, I'm curious for you, you worked in an ria, you helped advisors think about planning. You know, when, when markets were down, what, what first went to your mind and what were you guys talking to clients about of how to take advantage of this opportunity?
- [01:55]
B
Yeah, I think oddly enough from an estate planning perspective, a lot of times when markets are down, it represents actually an opportunity. Because from an estate planning perspective, especially when it comes to estate tax planning, the idea is to get assets out of the estate at the most discounted rate you can at the lowest value you can and have them grow outside of the estate. So, for example, if you can get an asset into a spousal lifetime access trust, into an intentionally defective grantor trust that's outside of the estate, and you make that gift, and let's say that gift is of stock or a brokerage account, it's $5 million. And then after you make the gift, you use up your estate tax exemption up to that $5 million if it then thereafter grows to be $20 million. Now that's all grown outside of the estate and hasn't affected your estate tax exemption because you made that initial $5 million gift. Everything happened outside of the estate. So it can be a tremendous opportunity. Obviously there's risk. There's not only legislative risk. We don't know what's going to happen with the tax law. We don't know if there's going to be an estate tax repeal. We don't know if the Tax Cuts and Jobs act is going to sunset. We think maybe it's probably not going to. And the estate tax exemption will keep inflating. So there's risk there. Because if you gift assets out of your estate, even if you think they're going to grow, but then the estate tax exemption stays high, then you're in a situation where you're going to lose a step up in basis. So there's risk there legislatively, obviously, as you know, there's also market risk there. You have to be confident to think that this is actually down and it's going to grow and it's not just going to keep going down. That's another thing to think about, but definitely represents an interesting opportunity to think about.
- [03:49]
A
Yeah, I think we take away the side of like, oh, what happens to state taxes in the future? Like, we're looking at this through the lens of like, okay, we think that you're going to have an estate tax issue and we want to plan for that and so planning for that. Right. I think you made a few good points. I think one of them is, you know, you want to use assets that are actually have gone down in this opportunity. Right. So like there are parts of the market that have not gone down. You know, typically areas that just, you know, tariffs wouldn't affect. But in general, if you see something go down, it's an opportunity to get more out of your estate using less exemption. Right. So I'm thinking about, you know, I have a client and you know, their, their parents have used most of the exemption. They only have a little bit left. Well, you know, let's say you only have two or three million dollars left, you're going to get significantly more shares of stock over when the market is down 20, 30%, for example. I still think you want to pair this with high growth assets, right? Like, you're not going to be like, okay, let's move something over that's down 5% when we think the growth is going to be Minimal. Because if there's minimal growth, you're not getting much out of your estate and you're not avoiding much in estate taxes. The second good point you made is don't just put something in because it's down, right? Because let's say you own terrible individual Stock. It's down 55% today, and you're like, great, I can move all of it there, but that's an investment you wouldn't really want to even own long term. If it's not going to grow, it's not going to be beneficial. Right. Like, you really are just trying to get growth out of your estate. I think those are probably two of the most impactful things. I think when we think about this practically though, how do you do this? Because it's not as simple as like, market's down 20%. Estate planning attorney, drop me a slat. Great. Documents are done. Hopefully now I have the opportunity to get it. Like when, when you guys are helping people do this in practice is this. We already have these trusts set up. Because what I see in practice a lot of times is people do set these up. They don't always max fund them right away. There are different times where we're like, hey, we're opening up the tool so it's available. There's also times where people just drag their feet, right? We see it all the time. They maybe got something set up and then they're like, ah, I'll think about it later.
- [05:47]
B
Yeah, absolutely. I mean, certainly that's, that's important to understand is this takes time. And this is a very, very hot time for estate planning. We have the great wealth transfer. Estate planning. Attorneys are busy. They have plenty of clients. They're not starved for business. So someone calls and says they need a slat or whatever the grat, whatever the case, is some kind of wealth transfer tool. Because of where the market is, the likelihood that they're going to be able to quickly turn around, get that trust in place, and then be able to move the assets in kind over to that trust while the market is still down. I'm not sure you know, how likely that is. And so it is important to understand that you need some Runway with this. It's not something that you can do on the fly if you have no documents in place. You know, we had all this going on over the past few years where even, you know, there were years ago it was thought that potentially grantor trusts, or even recently, actually with the recent election, depending on how it went, people were concerned that grantor trusts were no longer going to be an option for individuals. And so what people were doing is they were saying, well, at least create one. Just get one in place as a standby so that when the opportunity presents itself, you can fund it. And that's even happening now with the potential sunset of the tax cuts and jobs act, because a lot of people want to get assets out of their estate before it sunsets. The issue is we don't think it's going to sunset. We don't know that. So there's a lot of unknown. So it is. It can be good to at least get some kind of trust in place as a standby to be able to fund it even if you're not going to max fund it yet, because, you know, later on that transfer vehicle is still going to be valid. Later on is something you can move assets into pretty easily without needing to coordinate with the attorney and all the time that could potentially take to get it in place.
- [07:50]
A
Yeah. And I think grad is a really good tool to think about in today's environment. Right. So whether, you know, we actually, I recently did a financial plan for a client that's a little over 30 million net worth. And, you know, one thing that he was talking about is, you know, I don't know how much estate tax planning I want to do today. You know, we're thinking about Roth conversions. You know, terrible time for Roth. You know, great time for Roth conversions is down markets. But he was thinking about like, hey, I want to start getting a little money to my kids. You know, what if, you know, what if estate tax threshold gets cut down, you know, spouse passes away, etc. You know, I want to do some things today. You know, grants are a good opportunity for that. Or people who have already used the exemption to say, hey, let's start a grant when the market's down. Right. Because it's all about growth and beating that hurdle rate. And so typically, you know, if you look at what happens in stock market, you know, 1, 2, 3, 4 years post, you know, recessions, if you want to call a recession or at really a bear market, you know, that does create a really good opportunity to potentially get a lot of growth out without using any estate exemption.
- [08:48]
B
Yeah, absolutely. You know, as we talked about, you know, there's risk there. Right. Is it going to beat that hurdle rate when, you know, the 7520 rate is potentially high?
- [09:00]
A
Right. The downside of a grass. Oh, we just really didn't get anything out. We still own the investment. It still goes back to Us. So, you know, at least the downside is, you know, maybe, maybe shoot for it. Right?
- [09:10]
B
That's exactly right. There's not a lot of downside to a grat. Obviously the downside is, you know, attorneys fees and complexity and getting all that done. But to the extent that, you know, you feel obviously you don't want to do it like, like as a complete, just, just throwing it against the wall, hoping something's great. I mean, I guess you could, but, but you know, you want to at least have an expectation that you're going to be able to beat that hurdle rate and there's going to be some upside to it. But definitely in a down market, that makes a lot of sense. In a low interest rate environment, it makes a lot of sense as well. So these are times, you know, when, when the economy's in interesting time periods where it's down market or the interest rates are low. Those are when you're looking for these opportunities to get assets out of the estate so that you can utilize some of these transfer vehicles.
- [10:03]
A
And you know, if you're watching the ten year curve, like, you know, the rates are not going down, they've actually been the opposite. You know, went down for a day, now they're back up. And the interesting thing about that is I think staying on top of that is also an opportunity as well. You know, so if, if that creates opportunities over time that might be better, you know, for your family to do loans, right? You know, hey, can I help my kids get a mortgage? Can, can they borrow from me? Are there other things that we can do as rates drop? Because those AFR rates drop as well. But not, I think a lot of people look and say, well, hey, if the market starts doing bad, then all of a sudden they're going to drop rates. But that doesn't necessarily mean long term rates drop, which doesn't mean borrowing rates drop. So these are things as an advisor, right, you can stay on top of. We can't predict where it's going, but as they happen, you know, hey, down market, great time to gift stock, right. You know, it also can be, you know, business valuations go down typically in this period of time too. So I'm thinking about, you know, I have a client right now who they're passing the business from dad all the way down to kids. Well, if they have a business that brings in a lot from China, I'll tell you, the valuation of that business is probably going down a lot because you're thinking about increased cost of goods, you're Talking about reduced profits. Hey, can we get money moved over in this opportunistic period of time where there's so much uncertainty as well?
- [11:18]
B
Yeah, absolutely. Yeah. And I think, you know, the other thing is that's really important, and I talk about this a lot, is we don't know what's going to happen. So it's just really critical that you have flexibility. So we talked about, you know, getting those documents in place potentially to be able to fund if you think the time is right, because you have it in place. The other thing is making sure that you have the right, even revocable trust documents, the right power of attorney in place. Because what if something happens and you become incapacitated? You want to have someone to have the opportunity to be able to take advantage of some of these opportunities on your behalf. And if you don't have the right documents in place, you haven't given them the right powers. And, you know, estate tax mitigation and trying to preserve as much wealth as possible is a big priority for you. If you haven't got these documents in place, that's given your next person in line, whether it be a spouse, child, whoever the fiduciary is, to have the opportunity to be able to take advantage of some of these things, because we don't know what's going to happen now. You're going to be in a worse position and they're going to be kind of stuck. So you, you really need to think about two things. You need to think about, how can I take advantage of the opportunity now by doing transfers and utilizing what's available now, but also making sure that my documents are flexible enough that if something happens to me, my fiduciary is going to be able to take advantage of that for me.
- [12:48]
A
Yeah, yeah, really good points. I think, you know, the other place that my mind goes in, this is maybe a little outside maybe. I guess this is still in the estate planning realm of some of these. But down markets create good opportunities for certain things, right? So if we think about up markets, up markets are great. Time to do, you know, charitable giving. You know, you can donate more, get it, you know, use less stock. You can get a larger deduction against your income. Down markets are less about that. They're more about gifting. They're about Roth conversions. And I think Roth conversions is one I've seen more people talk about recently. But it's a really good opportunity. Sometimes people are like, hey, I don't want to, you know, do too much in Roth conversions that I'll move from 24 to 32. But you're like, you know, I had somebody reach out to me, they're like, how am I supposed to do this by myself? Like what happens if I hit 32? If you have 10,000 extra, hit 32. I mean you paid $800 more in tax than if you did 24% bracket. So not that impactful. But right now down markets create the ability to like, let's say you had 100,000 of room before, you know, that's now down 20%. You can either do that same amount for 80,000 or you could effectively get an added almost 20% more stock converted by filling that amount, which is also a good estate tax planning tool. Right. A lot of what you talk about older clients is, you know, you have a lot of money in pre tax. You are in a lower bracket than what your kids are going to be when they inherit this money. You know, should we be thinking about Roth conversions? And that still minimizes, not estate taxes, but more so maximizes total wealth preserved in your family.
- [14:16]
B
Yeah, you know, I talk about this often and it's timely because the Masters is this weekend. And I talk about, you know, when golfing. One of the big concepts is a good miss. Right. You're shooting for a target, but if you don't hit that target, you're still gonna land in a safe area. And I think that's one. That's the way that Roth conversions potentially work. Right. Is there's still like, even if it doesn't work out exactly how you planned, how you're projecting the reason you're doing it, you're still probably going to end up in an okay position because now you've converted it over into be tax free. Beneficiaries usually have to take it out within 10 years after death. And if they were inheriting it and it was pre tax, they'd be have to realize all those taxes over a 10 year period. Whereas if it's in a Roth, they still have to take it out within 10 years, but they could let it grow until year 10 and then withdraw it all and have all that growth be tax free, which in itself might have been a great reason to do the Roth conversion. So I just think it's, it's such a great opportunity for that.
- [15:23]
A
It's funny you say that because in like the XY Planning Group today, somebody was like, hey, CPA told my client that they have inherited Roth IRA and they need to take yearly RMDs. And every, all these CPAs came in was like, yes, you have an RMD, take it out every 10 years. But that's actually not true with Roth inherited accounts. You don't need to take a yearly rmd. Roth accounts are not even subject to these. You have a 10 year period in most periods of time. Right. If you don't need that money, let it grow 10 years tax free. Right. At a 7% rate of return, that's over another double tax free. Right. You typically want to use that.
- [15:58]
B
Right. And yeah, and a lot of people don't realize that like a lot of the pre tax IRAs, they have these new rules with the Secure act that you need to take this RMD, it all needs to be withdrawn within 10 years. It doesn't necessarily mean 1/10. It's still according to life expectancy, but it's according to rules related to pre tax IRAs. So the Roth shouldn't apply to that. You should be able to keep it in that Roth for 10 years if you want to.
- [16:25]
A
Yep, exactly. Okay, cool. Anything that we haven't talked about as it relates to utilizing down markets with estate planning and financial planning?
- [16:33]
B
Yeah, no, no. I think, I think we covered most of it. I think it's just really important to look at the landscape and look at what risks are there. Certainly not jump into anything just because you see an opportunity. Make sure that you understand comprehensively all the pros and cons. It definitely represents an opportunity. But on the other side there are risks. So you just got to be really careful.
- [16:56]
A
Yeah, completely agree. Okay, well, I think this was a really timely one. Everybody. We appreciate you listening. Again, this is all just purposes for you. Like we can have all these tools, we can think about them, but one client versus the other might be doing exactly different things. So really take this, apply it to your client's life. But everybody, thank you for listening. We really appreciate it. If you have any questions, you know, feel free to send them to us. I think this year we're trying to do a few episodes where we're just kind of hitting on topics that advisors are sending to us. But remember, rate, subscribe and we will see you back next week.