Estate Planning During a Bear Market

The power of a plan is never more important than when times are tough

Thanks to inflation, rising interest rates, the war in Ukraine, and other economic factors, the S&P 500 officially entered a bear market on Monday, June 13. The definition of "bear" is fairly arbitrary — it means a 20% decline from recent highs, and there's nothing special about that number — but the effects on investors are significant. These market conditions matter for financial planning, and in particular, for estate planning.

The first key takeaway: don't panic. Bear markets, and even recessions, are temporary. Estate planning is about the long haul. The last thing you want to do during a bear market is make short-sighted changes to your estate plan that may come back to haunt you years down the road.

However, when the market is this low, you do have opportunities to strengthen your estate plan—if you have the financial flexibility to do so.

Certain transactions are to your tax advantage during a bear market

One advantage of a bear market is that you may be able to take advantage of the way the gift tax works. When you gift an asset — either in a single transaction or over time — the gift tax is based on the Fair Market Value of that asset on the day the transfer takes place. So, if you gift shares of stock that are currently trading at low values, the gift tax will be lower relative to the future value of the asset.

Such gifts can be structured as trusts and even designed to split the interest in the gift through mechanisms such as a Grantor Retained Annuity Trust (GRAT). However, some of these mechanisms, while they may benefit tax-wise from the bear market, may also be impacted by rising interest rates, so you need to think through all the implications before making a decision.

A bear market may also be an opportune time to sell an ownership stake in a family business to allow the next generation to buy in at a more favorable price, or to diversify your investment portfolio while many assets are relatively inexpensive. Again, the key is to think long-term. Bear markets are temporary, and indeed, they need to happen occasionally in order for investments to function. By investing wisely and thinking through each element of your estate plan, you can set yourself up to come out ahead and preserve your legacy.

Talk to an experienced attorney about any changes to your estate plan

It's easy to get caught up in the vagaries of the market and make reckless moves that could affect your future. That's why it's in your interest to talk to someone with a trustworthy outside perspective about your estate plan. As attorneys experienced in both estate planning and tax law, we are well-equipped to help you work through all the legal implications of any changes to your plan during the bear market and advise you on the best course of action.

Remember, depending on what types of moves you want to make, there may only be a short window of opportunity. If you're considering changes to your estate plan during the bear market, contact Brown & Jensen today.