The failure of Silicon Valley Bank presents a chance for estate planning.
An ideal chance for those who can think ahead in the long term exists due to the drop in stock prices of banks.
In the face of a bear market, legendary investors like Warren Buffett have long seized the opportunity to take advantage of the decline in stock value. Now, individuals have the chance to follow in their footsteps and reap the benefits of investing in depressed stocks. Not only can investors benefit from the potential for rapid growth in a bear market, but they can also take advantage of current income tax benefits. Historically, bear markets have been followed by bull markets, where investors are able to recover losses and more. This makes now a great time for investors to get involved and make the most of a difficult market situation.
The March 13, 2023 stock market crash is a blessing in disguise for estate planners, as gifts made in the wake of the crash will come with a significant tax savings. The example of First Republic Bank (FRC) illustrates this perfectly. On March 9, the stock was trading at $80 per share. After the crash, it dropped to $32 per share - an almost 62% decline in value. Despite the drastic decrease in price, the bank itself remained unchanged, making it as safe an investment on Monday as it was on the prior Friday. When the market recovers, companies like First Republic Bank are likely to lead the way and exceed the overall market growth. As such, making a gift of 1,000 shares of First Republic Bank on Monday means gifting $32,000 of stock that would have been a gift of $80,000 on Friday - a 62% reduction in gift tax savings. Moreover, the gift-giver also gets the benefit of any future income - dividends and interest - earned from the investment.
Making a charitable gift doesn't have to be an all-or-nothing proposition. Thanks to split-interest gifts, such as a Grantor Retained Annuity Trust, or GRAT, donors now have an opportunity to give with the assurance that the beneficiaries will receive more than the initial gift amount. With a GRAT, the donor makes a gift to a trust, but retains an annuity – a right to receive payments for the term of the trust. The annuity can be structured so that the gift value of the GRAT is reduced to near zero, and the remainder beneficiaries will receive any gains from the trust's appreciated assets when the term ends. This type of gift is a great way for donors to contribute to a worthy cause while ensuring that their beneficiaries will receive an even greater benefit.
As interest rates reach historic lows, potential donors have a limited window to take advantage of gifting techniques such as Grantor Retained Annuity Trusts (GRATs). These split-interest gifts are highly sensitive to rising rates, so those considering them should act quickly. The Build Back Better Act has proposed new tax laws that may make these gifting techniques more onerous, so donors should act soon to take advantage of the current favorable tax laws and regulations. Time is of the essence for those considering split-interest gifts, as rising interest rates and new tax laws could make them far less attractive in the near future.
In the midst of a Bear market, where stock prices are dropping and inflation is rising, investors may feel the pinch of short-term losses. But for those with the courage to stay the course, the Bear market could be a great opportunity to leverage their assets and reduce their gift and estate taxes in the future. By monitoring the market and adjusting their strategies, investors can take advantage of the current economic situation to maximize their wealth and minimize their tax burden.