There have been two extended bear markets in the last thirty years. One followed the dot.com collapse in 2000, and the other was associated with the financial crisis.
The chart below shows the weekly S&P 500, in blue, along with its 50 week moving average (green) and its 100 week moving average (red).
The 50 week moving average crossed the 100 week moving average on the way down twice. Each time, it signaled a several-years long bear market.
The first time, in 2000, the market declined until 2003. The second time, in 2008, the market declined much faster, and more steeply. The circle labeled “3” shows that the 50 week is poised to plunge through the 100 week.
Is this signaling a bear market?
Locking In Gains
Some advisors are urging clients to lock in gains, on entire portfolios, and especially on large positions.
Other advisors are advising taking profits on all positions, large and small, that have big percentage gains.
The problem, of course, is taxes.
Taxes
Capital gains taxes on sales of appreciated positions are a return killer. For most significant gains, the capital gain tax plus state income tax ranges from 23.8% all the way up to 37.1% for those unfortunate enough to be subject to California tax.
But there are some ways to avoid tax on sale.
664 Trust
Many owners have large gains, and would face a large tax if they sold. The desire to avoid paying tax is often a primary reason stockholders that should sell, don’t sell.
A good solution for many is a Sec. 664 Stock Diversification Trust.
A Sec. 664 Stock Diversification Trust is a tax-exempt trust that allows stockholders to contribute their stock to the trust so that the trust can sell their stock, tax-free. The proceeds of the sale can be reinvested by the stockholder’s financial advisor, allowing the assets to grow tax-free. The client does not have access to these assets, but does gain the right to an annual income stream of up to 5% of the assets; this can be deferred to allow the assets to continue growing inside the trust, tax-free.
A Sec. 664 Stock Diversification Trust is often a great solution for clients who want to remove the excess risk they face from their concentrated holdings but are resistant to pay the heavy taxes on such a sale.
If you think a Sec. 664 Stock Diversification Trust could be right for one of your client situations, please reach out to us. You can use the form on our website to schedule a meeting with us, or call our office and ask for Connor or Ryan.