Wealth Planning

How you might protect your financial health in the pandemic

For U.S taxpayers: Five actions to consider in the spring of COVID-19.


What can we as individuals do as the novel coronavirus sweeps the globe, markets roil and governments try to contain the damage?

We might focus on what we can control, put to good use any extra time created by social distancing, make sure loved ones are doing well, understand how governmental actions might affect us, and try to contribute to the general good.

Applying these potential responses to our firm’s area of expertise—wealth planning and investments—our advisors offer you this spring essentials action plan for financial planning during the coronavirus.

Here are five steps that may be particularly advisable for you to consider taking now: 

1. Review your financial goals and plans—for your sake and your family’s

Virus-sparked market swings have shaken many people in the last month. Major shocks to the financial system are to be expected periodically, though we have not had one of this magnitude in more than 10 years (and even then, it did not hit this quickly).

Now, before making any adjustments to your wealth plans, it would be wise to speak with your J.P. Morgan advisor about financial advice for the coronavirus. This is a good time to:

  • Discuss how you are feeling in the wake of this shock. Has it has changed your views on your plans? Are you still comfortable with the assumptions on which you’ve based your portfolio, personal wealth plans and estate plans? Is your portfolio properly positioned to support your long-term goals?
  • Check that all your key legal documents are in place and support your wishes.

    Every U.S. adult needs to have, at least, a current Health Care Proxy, Power of Attorney and Will (or Will substitute1).

    Beyond basics: If you have created a revocable trust but have not yet funded it, we strongly advise you to do so immediately. Courts are closing down across the United States. If for any reason you were unable to manage your assets, no legal authority would be available to designate a personal representative for your affairs; funding a revocable trust might be a solution. To fund your existing revocable trust, simply ask your J.P. Morgan representative to transfer your individually held assets into the trust.

    If you have not yet created a revocable trust, we strongly advise contacting an estate planning lawyer to discuss whether this protective strategy is suitable for you and who should serve as trustee for this trust. 

2. Make sure your investing is “tax aware”

As the markets began to seesaw, we were inundated with calls from clients asking what they could do—especially with the losses in their portfolios. A strategy to consider is “harvesting” the losses, that is to say, use them for tax purposes to offset gains, now and going forward.

However, if you do decide to do this, be aware of the “wash sale rule” that, if triggered, can delay your ability to take a loss you have actually incurred on the sale of a security. 

Here is what you CANNOT do if you want to take a loss: Sell the security at a loss, and buy that same position, or a substantially identical security, within 30 days before or after selling the loss position.

Here is what you CAN do if you want to take a loss: Sell the security at a loss. If you want to maintain the exposure to the same certain sector or industry, buy a different security with similar characteristics (if you want to maintain the exposure to a certain sector or industry). For instance, you might sell stock in one technology company and purchase shares in another technology company or a technology-oriented mutual fund.

It is essential you consult with your tax advisor so that you do not run afoul of the wash sale rule, but using a tax-loss harvesting approach might help you take a fresh look at the portfolio you have and ensure it’s the one you want to own into the future.

3. Assess your best planning strategies in light of recent government actions and lower stock values

  • Two important changes have been made regarding retirement accounts:
    • IRA owners and beneficiaries do not have to take what would have been their required minimum distributions from their retirement plans this year. Federal lawmakers recognized that, because RMDs are determined based on the last day of the previous year, distributions this year would be outsized if withdrawn from current, potentially depreciated portfolios. The lawmakers are giving IRA owners time for their portfolios to recover. 
    • The deadline for last year’s contributions to your IRA, originally April 15, has been extended to July 15.
  • Two key moves to consider making with depreciated assets, if these actions align with your goals:
    • Convert a traditional IRA to a Roth. If the traditional IRA’s assets are temporarily lower, you may pay less in tax now on a conversion. Withdrawals from traditional IRAs are taxed at your current income tax rate; withdrawals from Roths are tax-free.
    • Transfer wealth to family. It would use less of your lifetime gift tax exclusion amount if you gift depreciated assets (including underwater options). However, avoid gifting assets whose current value is less than their basis. You also may want to take advantage of the low interest rates to create GRATs or make intra-family loans.

4. Contribute to the general good

Depreciated assets mean that now is not a financially advantageous time to give to charity. But just as clearly, there is a great need around the world. Nonprofits sorely need donations to help ease the suffering caused by COVID-19 and to continue the work they’d be doing even without a crisis.

For these reasons, the U.S. government is seeking to encourage charitable giving, both large and small. The CARES Act created two highly unusual provisions that allow you to:

  • Deduct up to $300 of cash contributions made to charitable organizations this year, whether you itemize or not.
  • Reduce your tax bill to zero—if you donate to a public charity a cash amount equal to your 2020 adjusted gross income.

Note, though, that contributions to your donor-advised fund and private foundation would not qualify for these tax breaks.

5. Pay attention to special actions you may be able to take as a business owner, executive or entrepreneur  

  • Business owners—Many provisions of the CARES Act may help you. Be sure to speak with your J.P. Morgan advisor to explore how. A lot of focus has been on loans to small businesses through the Paycheck Protection Program. However, one of the most potentially beneficial measures for owners of flow-through businesses is that they will be able to apply 100% of their net operating losses for 2018 through 2020 to their incomes from up to the previous five years. That means they could file an amended return for those previous years and receive refunds. The federal lawmakers’ goal is to help provide a cash infusion for businesses that have big losses this year.   
  • Corporate Executives—If your company’s stock is down, now could be a good time to take positive actions for you and your company, such as utilizing a 10b5-1 plan to show faith in your firm’s future by buying its stock, if you’re in a position to do so. Also, you may want to revisit your options exercise strategy.
  • Entrepreneurs—Have you exercised incentive stock options (ISOs) earlier this calendar year, only to see your company’s per share valuation decline? Or do you expect the share price to go down? You may want to consider doing a “disqualifying disposition” on the ISOs to avoid a potentially large alternative minimum tax (AMT) bill. You have until the end of the calendar year to disqualify your shares by selling, exchanging or otherwise transferring them. Doing so would eliminate the AMT. Instead, you’d pay tax at ordinary rates on the positive difference (if any) between the sale price and the strike price.

We can help

It’s our mission to help you take care of yourself and your family financially during these unusual times. Your advisor is available to answer questions and help you plan with financial planning during the coronavirus. Please do not hesitate to reach out to us.

1 For example, revocable trusts can often accomplish what Wills might do. 

 

 

 

 

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