A declining stock market and dropping interest rates can sometimes put financial plans on hold. But there may be an opportunity during this current slowdown for investors who expect the economy to recover. If you transfer property now, you may be able to reduce the size of your taxable estate and improve your chances of passing on more tax-free funds to your beneficiaries.
First, the income tax advantage: any stocks that you want to hold long term yet have a loss currently, should be sold so you can take the deduction on your tax return (limitations apply). You can then repurchase these shares in 31 days (if you repurchase sooner, IRS does not allow the deduction). Some people are so emotionally tied to never taking a loss, they miss this tax advantage. IRS is happy to help you but you will not get a call on the phone. You must make the sale to capture the tax advantage.
Secondly, if you have an IRA, converting to a Roth IRA is more beneficial when your IRA has dropped in value. By converting to a Roth, you convert a tax deferred account to tax free, but must pay the accumulated income tax on today’s value. What better time to make the conversion when the value is down and your tax will be lower?
As to estate taxes, you can transfer more assets and use less of your $1 million exemption. Let’s hypothetically assume you have 1000 shares of stock that were worth $1.2 million 2 years ago. You could have transferred those shares out of your estate (e.g. to a trust) but would have had to pay gift taxes on the amount over $1 million. If today, those shares have declined in value to $1 million or less, you can transfer them without tax. Reduced values allow you to transfer more property before estate taxes take effect.
To learn how to make the most of asset values that have declined, check off on the attached coupon for a consultation.