We write this post during an extremely volatile time, with experts arguing whether the current fluctuation of the stock market is a correction in a bull market or the beginning of a bear market. It is important to consider both possibilities. While we all can appreciate the benefits of stocks increasing in value during a bull market, a bear market can help you transferring control of family wealth to the next generation while helping to minimize federal estate taxes as well as to reduce MA estate taxes.
Market Volatility Can Be a Friend of Your MA Estate Planner and Your Estate Plan
Price-to-earnings ratio (P/E) is the market’s way of predicting a stock’s future rise or decline. A stock with a P/E ratio of 10 will trade at 10 times the current earnings of the company, while a stock with a P/E ratio of 25 will trade at 25 times its current earnings. When the P/E ratio declines, the market is predicting that the growth of the company will be declining in the near future, and when the P/E ratio goes up, the market is predicting that the company growth will increase in the near future. If you are planning to hold on to a stock for longer than, say, five to ten years, you have an opportunity to take advantage of a declining P/E ratio. Keep reading to learn how.
Example of Using Stock Market Volatility to Reduce Federal and MA Estate Taxes
Prior to the recent market turmoil, General Electric (GE) stock had been trading with a P/E of 20 or more, which showed the market’s confidence that the company will continue to supply strong dividends and grow. Recently, GE’s P/E ratio has dropped to about 16, and as recently as 2011, GE traded at a P/E below 12. If you are planning to hold GE stock for longer than five to ten years, you might consider making a gift of some of the stock—directly or in a trust—to your beneficiaries while the market is discounting the value of the stock. If, say, you gifted the stock when it is trading with a P/E of 12, and it later returns to a P/E of 20, you will have saved 40% of the gift or estate taxes you would have had to pay.
Estate Planning—Using Market Volatility to Reduce Your Estate Taxes
When you are looking at your portfolio, consider not only the pains of declining stock prices, but also the pleasure of having the market discount the value of your gifts, an in turn, minimize your federal estate burden, as well as reduce your MA estate taxes. An estate planner can help you learn how to best take advantage of these opportunities.