The sudden and unforeseen collapse of Silicon Valley Bank in California and Signature Bank in New York, on March 9, 2023, led to the decline in bank stocks of as much as 60% on Monday, March 13, 2023. In the short term, the volatility of the banking sector will remain, but in the long term high quality bank stocks will recover, as they did after the 2008 financial crisis. This decline provides an excellent opportunity for those who can plan for the long term.
Historically, Bear markets are followed by Bull markets, where the losses are more than recovered for those investors with the stomach to stick it out. Indeed, the best growth in the market most often occurs in this subsequent Bear market. The result is that the Bear market is an opportunity seized by legendary investors, such as Warren Buffett, to invest in depressed stock and take advantage of their decline in value. Individuals who own or buy banks stocks can similarly leverage these depressed shares to make gifts that will appreciate more rapidly in the future, as well as taking advantage of some current income tax benefits.
Gifting can be done in many ways, but the most common is either to make an outright gift or to make a gift over time. Either type of gift can be structured as a trust. In either case, the possible gift tax due is based on the Fair Market Value of the assets transferred as of the day that the transfer takes place. For example, First Republic Bank
In addition to making outright gifts, you can also make split-interest gifts. A split-interest gift is where you split the interest in the gift between current beneficiaries and remainder beneficiaries. One example of this is a Grantor Retained Annuity Trust, or GRAT. A GRAT is where you make a gift to a trust but retain the right to annuity for the term of the trust. Depending on the amount of the annuity, the actual gift value of the GRAT could be reduced to near zero. If the assets appreciate at a higher rate than the payout of the annuity, then the remainder beneficiaries will end up with an amount greater than the initial gift to the GRAT.
Many of these split-interest gifts are highly sensitive to rising interest rates; and some, such as GRATs, have been targeted for more onerous tax treatment in both regulations and proposed new tax laws in the Build Back Better Act. There may be a narrowing window in which to utilize these gifting techniques while the interest rates are at historic lows, and the tax laws and regulations are more favorable than they are likely to be in the future.
Although the Bear market and rising inflation, causes a great deal of short-term pain, if you have the stomach to stick it out, then the Bear market is an opportunity to leverage your gifts and reduce your gift and estate tax burden in the future.