Market volatility can be unsettling, particularly for people approaching retirement or managing substantial investment portfolios. Falling asset values may raise concerns about retirement income, investment performance, and the amount of wealth that can ultimately be passed to family members.
For estate planning purposes, however, a temporary decline in asset values can create opportunities that may not be available when markets are rising. Certain strategies can allow individuals to transfer assets, make gifts, or restructure parts of their estate while values are lower.
Estate planning often involves considering both the value of assets and their potential future appreciation.
When investments decline, their current value may be lower even if the owner expects them to recover over time. That difference can create an opportunity to transfer an asset at a lower valuation, while allowing future appreciation to benefit the recipient.
The effectiveness of any strategy depends on the type of asset, the individual's circumstances and the applicable tax rules.
Market downturns may provide an opportunity to transfer investments to family members or trusts when their current value is reduced.
A gift of an investment worth less today generally uses less of the available gift and estate tax exemption than the same asset would if its value were substantially higher. If the asset later appreciates, that future growth may occur outside the donor's taxable estate depending on how the transfer is structured.
The potential advantage of a gift during a downturn comes from the possibility of future recovery and appreciation.
For example, an investment that has declined substantially may eventually return to its previous value or grow beyond it. Transferring it while its value is lower can shift some of that future growth away from the original owner's estate.
Tax consequences and gift reporting requirements should be considered before making such a transfer.
Certain trusts may also become more attractive during periods of market weakness.
A person who already intends to transfer appreciating assets to a trust may be able to transfer them at a lower current valuation. Future appreciation can then potentially accrue within the trust rather than remaining part of the original owner's estate.
Market volatility can also provide a reason to revisit existing trusts.
An asset that was transferred previously may now have a substantially different value. The change may affect the balance of assets within a trust or the overall estate planning strategy.
Reviewing the trust and its underlying assets can help determine whether the current arrangement continues to serve its intended purpose.
Retirement accounts can represent a significant portion of an estate, particularly for people who have accumulated savings over many years.
Market declines may affect account balances and, therefore, the potential value eventually passed to beneficiaries. A downturn can also be an appropriate time to review beneficiary designations and consider whether the existing retirement strategy remains consistent with broader estate planning goals.
Retirement accounts generally pass according to their beneficiary designations rather than simply following the instructions in a will.
Beneficiaries should, therefore, be reviewed after major life events and as part of a broader estate plan review. The designation should be consistent with the intended inheritance strategy and the provisions of any trusts involved.
Volatility can create opportunities. However, that does not mean every declining asset should be transferred or sold.
Estate planning decisions should be based on long-term objectives rather than short-term market movements. A strategy that looks attractive during one period may create tax, investment, or family consequences that outweigh its potential benefits.
An investment decision should be evaluated within the context of the person's overall financial picture.
Liquidity needs, retirement income, taxes, charitable intentions, family circumstances and existing trusts can all influence whether a particular strategy makes sense. Moving one asset without considering the rest of the estate may create an imbalance.
Significant market changes can provide a useful opportunity to revisit an estate plan.
Changes in portfolio values may affect the amount of wealth being transferred, the relative value of different beneficiaries' inheritances and the effectiveness of existing strategies. A review can also identify outdated beneficiary designations, trusts, or other provisions.
Estate planning does not need to respond to every market movement. Major changes in asset values, however, can justify taking another look at the overall strategy.
Market volatility can be uncomfortable. However, it can also prompt useful estate planning conversations. Lower valuations may create opportunities for certain gifts and trust strategies, while changes in portfolio values can highlight areas of an estate plan that deserve renewed attention.
The goal is to make decisions based on long-term objectives rather than reacting emotionally to temporary market conditions. When a downturn occurs, reviewing the estate plan can help determine whether current circumstances create an opportunity to improve how wealth will eventually be transferred.
Legacy One Law Firm, APLC is an estate planning and probate administration law firm in Los Angeles, California, serving families throughout the State. We help individuals and families establish living trusts, wills, powers of attorney, advance healthcare directives, and other essential estate planning documents designed to protect their loved ones and preserve their legacy. Schedule a quick and easy consultation with estate planning attorney Sedric E. Collins, Esq., or call 323-900-5450.
