How to Financially Plan Your Way Through Challenging Times

Aerial view of a very winding road. — (Image credit: Getty Images)

In March 2020, the world essentially went on a COVID-fueled hiatus, and the global economy became unpredictable. While the recent situation, spurred by global tariffs and other uncertainties, is different, the fears about the global economy and financial security are eerily similar.

Market fluctuations have shaken confidence, especially among families who are thinking about retirement, college costs and other major expenses.

For many families, college acceptances have been rolling in. Add the specter of fewer government education grants to the roller-coaster markets, and many wealth clients are wondering how this will all play out.

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The Kiplinger Building Wealth program handpicks financial advisers and business owners from around the world to share retirement, estate planning and tax strategies to preserve and grow your wealth. These experts, who never pay for inclusion on the site, include professional wealth managers, fiduciary financial planners, CPAs and lawyers. Most of them have certifications including CFP®, ChFC®, IAR, AIF®, CDFA® and more, and their stellar records can be checked through the SEC or FINRA.

If you had a plan in place before the market’s gyrations — and it was done right — then there should have been provisions built in for a downturn. Examine it now to make sure the previous assumptions and projections are still realistic.

For those who do not have a plan, this is exactly the kind of moment to think about devising a long-term plan that projects multiple economic scenarios.

Also, if liquidity is needed (maybe so you can pay that first college bill), be mindful of after-tax impacts. Don’t just look at a valuation and liquidate. Remember, money is fungible, and it’s the after-tax bottom line you want to consider.

We have been hearing from our clients, and these are the eight planning strategies we’re sharing that are particularly attractive in this kind of climate.

1. Gift depreciated assets

Now may be a perfect time to gift assets that have declined in value due to challenging market conditions.

The federal estate, gift and generation-skipping transfer (GST) tax exemption, which is the amount you can transfer tax-free, is at an all-time high of $13.99 million for individuals and $27.98 million for married couples.

While asset values have fallen, consider gifting more assets to maximize your federal lifetime gift tax exemption. The amount of the exemption used in making a gift is based on the fair market value of the asset transferred at the time of the gift.

Any future appreciation of these assets would be outside of your estate.

2. Maximize the high federal gift tax exemption

Many of the tax provisions of the Tax Cuts and Jobs Act (TCJA) are scheduled to expire at the end of the year. One of those is the federal estate tax exemption, which will drop in half to about $7 million on January 1, 2026, unless Congress takes action.

While Congress has begun to tackle this issue, along with other expiring tax cuts from TCJA, there is nothing certain at the time of this writing.

Take advantage of the increase now by making larger gifts that use up some or all your exemption. The earlier a gift is made, the longer it can potentially grow outside of your estate.

According to the IRS, if the exemption decreases in the future, gifts made prior to the decrease won’t be retroactively taxed. Therefore, from a down-market perspective, this may be an opportune time to do gifting while the high exemption is available.

3. Gift to a trust

When considering large gifts, you may wish to use a trust rather than an outright gift. A trust may be structured as a grantor trust, which is disregarded for income tax purposes, and the grantor continues to be responsible for the income tax associated with the trust assets.

Therefore, the basis of the property remains unchanged in the hands of the trust. If the grantor trust sells the assets, the grantor would recognize a gain or a loss as if he’d held the assets in his individual name.

Thus, the income tax the grantor pays on behalf of the trust is effectively another “gift” to the trust that doesn’t use the grantor’s federal gift tax exemption.

4. Take advantage of interest rates

Certain estate planning strategies are more advantageous in a low-interest-rate environment. While rates have moved higher since 2020, they still remain low historically. So, if you don’t wish to use your exemption or have used it already, you can consider these strategies:

Grantor retained annuity trust (GRAT). A GRAT allows you to transfer the growth on assets to future generations at a reduced gift and estate tax cost. With this irrevocable trust, you transfer assets expected to appreciate and retain an annuity stream for a fixed term. At the end of the period, the remaining assets pass to family members outright or in further trust.
Intrafamily loans. These allow a family member to provide low-cost capital to another family member. Properly structured, an intrafamily loan can provide attractive lending rates without gift tax consequences. Intrafamily loans have no limitations on how a borrower uses the proceeds. They can provide credit opportunities to family members who might not be able to obtain credit and at lower rates than commercially available.
Sale to an intentionally defective grantor trust (IDGT). A sophisticated strategy that leverages both low valuation and interest rate environments is a sale of assets to an IDGT, which offers multigenerational planning.

5. Do a Roth IRA conversion

A Roth IRA can be an effective planning tool given the threat of higher tax rates. By preserving a Roth IRA for as long as possible, you provide the opportunity for maximum growth that’s tax-free.

While assets in a traditional IRA benefit from tax-deferred growth, future distributions are taxed at ordinary income rates. Alternatively, a Roth IRA can grow tax-free while in the account, and distributions are income-tax-free.

6. Use tax-loss harvesting

During challenging market conditions, consider harvesting portfolio losses, allowing you to use your harvested losses against any future gains.

This offers taxpayers a way to ease the pain of a losing stock investment: Sell the security to offset capital gains incurred on redeemed “winning” securities.

However, there’s a caveat: If you buy back the same or substantially the same stock 30 days before or 30 days after, you’ll trigger the wash-sale rule, and the loss will be disallowed.

7. Move assets to Delaware

Those in high-tax states may have opportunities to reduce or eliminate state taxes on some income by establishing a trust or moving an existing trust to a tax-friendly jurisdiction, such as Delaware.

Using Delaware as a trust-planning jurisdiction is similar to using states that don’t have any income tax for a well-structured trust.

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Regardless of a taxpayer’s state of residence, a trust may be created in Delaware, and an existing irrevocable trust may be moved into Delaware for ongoing administration.

8. Reexamine existing trusts

If you have an existing grantor trust that has a swap power, you may wish to exercise it during this time of low valuation and interest rates. As grantor of the trust, you can substitute or swap assets of equal value with the trust.

If your trust has highly volatile assets, you may wish to swap cash into the trust and remove those assets. This would allow you to effectively “freeze” the assets inside your trust so that the trust is protected from any future downturn in value.

All these ideas should be discussed as part of a comprehensive financial planning process with your adviser, attorneys and family members. But using all or some of these tools could help during otherwise stressful and unpredictable times.

Wilmington Trust Emerald Family Office & Advisory® is a registered trademark and refers to wealth planning, family office and advisory services provided by Wilmington Trust, N.A., a member of the M&T family. Wilmington Family Office is a service mark for an offering of family office and advisory services provided by Wilmington Trust, N.A.

The information provided herein is for information purposes only and is not intended as an offer or solicitation for the sale of any tax, estate planning, or financial product or service or a recommendation or determination that any tax, estate planning, or investment strategy is suitable for a specific client. Note that tax, estate planning, and financial strategies require consideration for suitability of the individual, business, or investor, and there is no assurance that any strategy will be successful.

Wilmington Trust is a registered service mark used in connection with various fiduciary and non-fiduciary services offered by certain subsidiaries of M&T Bank Corporation. Note that tax, estate planning, investing, and financial strategies require consideration for suitability of the individual, business, or investor, and there is no assurance that any strategy will be successful. Wilmington Trust is not authorized to and does not provide legal, accounting, or tax advice. Our advice and recommendations provided to you are illustrative only and subject to the opinions and advice of your own attorney, tax advisor, or other professional advisor. Investing involves risks and you may incur a profit or a loss. There is no assurance that any investment strategy will be successful.

Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

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Alvina Lo serves as Head of Advice, Planning and Fiduciary Services for BNY Wealth. In this role, she leads the strategic direction, oversight and delivery of BNY Wealth’s advice planning advisory practice and fiduciary services. Alvina has 20-plus years of experience advising high-net-worth individuals and families, family offices, business owners and charitable organizations. Prior to joining BNY, she served as Chief Wealth Strategist for Wilmington Trust, where she was responsible for wealth planning, family office services and thought leadership development.