In the second half of 2021, how can you continue steering your financial plan forward amid uncertainty? Consider these 10 ideas.
1. Monitor your portfolio positioning.
Markets continue to experience changing dynamics amongst relative leadership. On the one hand, industries viewed as best positioned to benefit from easing COVID-19 restrictions have seen their share prices surge this year. On the other hand, supply chain disruptions challenge companies’ ability to support demand, resulting in ongoing challenges to benefit from increasingly laxed restrictions fully.
At the same time, interest rates and inflation expectations remain a focus of economists and the financial media. With this as a backdrop, the broad investment themes of “value” and “growth” have both experienced various periods of advance and decline this year. Ensuring proper alignment and rebalancing where appropriate may help your portfolio navigate the ongoing uncertainty as we move forward.
2. Incorporate possible tax scenarios in your planning.
With details of possible tax legislation changing by the day, this will be a year to pay attention to tangible developments. We don’t recommend making rash decisions based on conjecture. But as talks continue, understanding implications and managing income and deductions over the coming years could make a sizeable difference in your tax situation. Issues such as tax rates on capital gains above certain thresholds, major changes to cost basis treatment for inheritors, and removal of preferential treatment for carried interest are just some of the proposals we’re watching closely.
For investors triggering larger capital gains, Opportunity Zone Funds (OZFs) remain a valid consideration in certain circumstances, both due to the potential for higher (retroactive) tax rates and time left to leverage potential OZF benefits fully.
3. Practice sound personal cybersecurity habits.
Well-publicized data breaches within companies and government entities have highlighted the increasing sophistication of hackers, but the threat extends well beyond corporate settings. Vigilance in this area becomes ever more important as cyber threats evolve. 2021 represents a point in time where taking extra steps to protect your personal information, and financial security should become a major priority, if not already the case.
4. Consider RMD/QCD planning.
Required minimum distributions (RMDs) will proceed this year under normal rules after being waived in 2020. Evaluate the role RMDs will play in cash flow and tax planning. If your RMD is in excess of required tax payments, consider the use of year-end RMD withholding as a replacement for quarterly estimates.
Remember that qualified charitable distributions (QCDs) remain a viable option for the charitably inclined to partially or fully offset RMDs. For those considering QCDs, as noted earlier this year, it may still be wise to wait for clarity on tax policy and the resulting impact on itemized deductions.
5. Review insurance policies.
With record-low yields, dividend crediting rates on whole life policies may be negatively impacted. Without proper management, this trend could place certain policies at risk of lapse over time. Reviewing your policies now and developing a plan to protect your coverage allows time to make appropriate changes. It’s important to assess whether the current structure remains appropriate for your situation as well.
6. Develop your family education plan.
Now is a great time to refocus on your family’s financial future. Developing a proper plan to bring the next generations into the fold isn’t only a good complement to sound financial planning but critical to its execution. Developing the next generation to operate as sound stewards of your legacy is a high-impact activity that magnifies the benefits of prudent wealth planning.
7. Use low rates to your advantage for wealth transfer.
This environment is still extremely conducive for intrafamily wealth transfer. Utilizing notes between families or entities, selling assets to grantor trusts (such as a spousal lifetime access trust), or using grantor-retained annuity trusts (GRATs) all remain attractive strategies. Proposed legislation under consideration may include future restrictions on certain wealth transfer strategies, adding to the concept that this is a good year to evaluate these tools. Opportunities exist to revisit strategies already implemented as well. Two potential such opportunities include freezing upside in GRATs funded in 2020 and refinancing existing debt in place.
8. Review your estate plan.
2020 highlighted the importance of planning for the unexpected, and that lesson extends to your estate plan. Review the key tenets of your plan and confirm that they still align with your wishes. This includes trustees, personal representatives, financial and healthcare powers of attorney, guardians, and distribution provisions.
9. Don’t forget the estate planning “freebies.”
While this remains a favorable environment for advanced wealth transfer strategies, keep in mind the simpler options. The annual exclusion gift limit remains at $15,000 per person. You can pay for medical expenses without limitation, as long as you pay the medical provider directly. And you can still pay for education expenses, also with no limit, and again, as long as you issue payment to the institution and not the individual.
10. Plan for philanthropic giving.
Donor-advised funds and family foundation balances have swelled in recent years, due to both accelerated gifting for tax purposes and market performance. This is a great time to take a step back and develop or confirm your strategic plan for the funds available for grants moving forward.
Not sure where to start? Contact us.
As with many financial topics, these planning concepts shouldn’t be viewed in a silo. Your advisory team can work with you to tie those pertinent to you into your broader plan. Feel free to contact your relationship manager to discuss further.
Past performance does not guarantee future results. All investments include risk and have the potential for loss as well as gain.
Data sources for peer group comparisons, returns, and standard statistical data are provided by the sources referenced and are based on data obtained from recognized statistical services or other sources believed to be reliable. However, some or all of the information has not been verified prior to the analysis, and we do not make any representations as to its accuracy or completeness. Any analysis nonfactual in nature constitutes only current opinions, which are subject to change. Benchmarks or indices are included for information purposes only to reflect the current market environment; no index is a directly tradable investment.
Plante Moran Financial Advisors (PMFA) publishes this update to convey general information about market conditions and not for the purpose of providing investment advice. Investment in any of the companies or sectors mentioned herein may not be appropriate for you. You should consult a representative from PMFA for investment advice regarding your own situation.