Stocks Are Already Responding To Post-Covid Pent-Up Demand. What You Need to Know.

The narrative that Covid-19 vaccine inoculations will enable reopenings and a normalised economy has begun to play out. And while stocks have been down of late, the decline is actually a positive signal about the economy.

The hope has been that, as the roll-out of vaccines goes on, government restrictions will be lifted, and small businesses will rehire workers. The question mark, in addition to whether vaccinations will stop the pandemic, has been whether the economy will be healthy enough to bounce back.

After all, shops can only rehire if they have the cash, and consumers—many of whom are out of work—can only spend if they have money. Yet the trillions of dollars the government continues to spend to support the economy, including jobless benefits and direct stimulus checks, have provided a major boon for household cash savings.

The groundwork has been laid, it seems, for the demand the economy suddenly lost during the pandemic to come back just as fast.

At the same time, daily inoculations in America through January were many times higher than in December. The pace has remained brisk, with more than 65 million doses administered so far, according to the Centers for Disease Control and Prevention. States have indeed been reopening.

Economic data shows the improvement.

The unemployment rate is 6.3%, down from close to 15% at the depth of the pandemic and down 0.4 percentage point in January. Jobs are coming back, even if the labor-market recovery is uneven at times. Household incomes rose 10% in January from December.

As people grow more confident about their job prospects and safety, they are spending some of the cash they have accumulated. Retail sales rose more than 5% month over month in January. Companies are anticipating strong demand: Orders for durable goods rose more than 3% for January, more than triple the amount economists expected.

In short, reopenings are working for the economy and consumers are already unleashing pent-up demand. Economists expect gross domestic product to increase in the mid-single digits in percentage terms for 2021, a gain that would bring economic activity back to near the 2019 level. Economists at RBC Capital Markets wrote in a recent note that 9% growth for the year is conceivable.

On the surface, the stock market hasn’t seemed to reflect optimism. The S&P 500 is down more than 3% since Feb. 12. That is when interest rates begin their most recent pop higher, which makes the risk of owning stocks less attractive.

But growth stocks—a haven for investors during much of last year’s market turmoil—have been leading the decline. Those stocks are more sensitive to changes in rates and they are less influenced by economic growth than value stocks are.

The rising rates reflect changes that benefit value stocks: increasing expectations for inflation and better demand for goods and services. The Vanguard S&P 500 Value Index exchange-traded fund (VOOV) is flat since Feb. 12.

The strong economic trends are young. The most important factor now is how effective vaccines will be against new virus strains.

Happy is the family whose members—parents, grandparents and grown children—trust each other enough to cooperate on shared goals, especially financial ones. When that is truly the case, Uncle Sam’s tax rules can help as well.

This matters especially now that mortgage rates are above 7%, and many families are looking for ways to help younger members. If the elders have resources and are confident younger ones can cooperate, a family loan could make homeownership possible while providing the elders with a useful income stream.

Other strategies can actually lower taxes, such as when funding 529 plans or Roth IRAs, or when someone inherits a traditional IRA with required withdrawals larger than they will need.

Here are three strategies useful for functional families.

Intrafamily loans

It is perfectly legal for families to lend money to a relative for a down payment or even a private mortgage.

But it is important not to cut corners, says Ryan McKeown, a CPA with Modern Wealth Enhancement in Minnesota. If the loan is for a down payment, be honest with the mortgage provider and have a formal agreement. The lender owes tax on the interest payments received.

If the loan is for a private mortgage, both sides should have legal representation with a formal written agreement, including payment terms. The lender owes tax on the interest, and the borrower often can deduct it if he or she itemizes.

To avoid IRS trouble, the interest rate shouldn’t be lower than the agency’s Applicable Federal Rate at the time of the loan. Currently that is about 5% for loans longer than nine years; about 4.5% for loans three to nine years; and about 4% for loans three years or less. Currently, traditional mortgage rates are generally above 7%.

In addition, the lender could use the $19,000 annual gift-tax exemption (described below) to forgive some or all of the interest or principal annually. If both lenders and borrowers are married, that is up to $76,000 a year. There is no tax for the borrower on such forgiveness, because it is from a gift.

If you’re going this route, McKeown advises against having a fixed plan to forgive the debt. Instead, do it in one-off letters specifying the amount—and keep careful records. Otherwise the IRS might try to treat the loan as a taxable gift.

Asset gifts

Powerful tax-saving moves for families often use gift-tax provisions. Under current law, anyone can give anyone else up to $19,000 of assets annually, free of gift tax. That means a married couple with three grandchildren could give them a total of $114,000 in 2026.

The gifts can be cash or other assets, like stock. For noncash gifts, the cost basis—which is the starting point for measuring taxable gain after a sale—“carries over” to the recipient. So if someone buys $1,000 of stock and gives it away when it is worth $5,000, the recipient’s cost basis is $1,000. If the recipient later sells the shares for $8,000, the taxable gain is $7,000.

Here’s an example showing how gifts could save a family taxes. Grandma is a widow of modest means, while her child and spouse have prospered. The couple has two children, and they want to contribute $5,000 to a 529 college-savings plan for each—but they need to sell stock to do it. Their tax rate on the sale would be 18.8%, and they would need to sell about $11,000 of stock.

However, Grandma’s federal tax rate on the stock sale is 0%. If the couple gives $10,000 of shares to Grandma, she could sell them, pay no tax, and fund the grandchildren’s 529 plans. This saves about $1,000 of tax.

These moves are legal, and they could be used in other ways, such as to help a young person fund a Roth IRA.

But trust among family members is essential: Under the law, givers can’t put conditions on a gift. Grandma could use her stock proceeds to take a cruise, but she makes 529 contributions instead.

Mark Sellner, a retired tax attorney and CPA living in Sarasota, Fla., uses this strategy. His children sell stock he gives them and fund 529 plans for his grandchildren.

The family’s tax savings aren’t huge, but he likes other benefits. The sales by his children don’t boost his adjusted gross income, which in turn could raise his Medicare Irmaa premiums or his 3.8% surtax on net investment income.

Sellner doesn’t worry about his children using the funds for another purpose.

“There can’t be any strings attached to gifts. Of course, it is up to us to decide whether to make them in the future,” he says.

Two caveats: The “kiddie tax” applies to most children under age 24, and it is levied at the parents’ rate on investment income above $2,700 in 2026. Consider this before making gifts to a young person.

Investors who give away stock also forgo the step-up, an important provision that exempts assets held at death from capital-gains tax.

Sellner knows he’s losing a step-up, but says, “The children could use a little more now. Why should they wait 20 years to get it?”

Disclaimers

A disclaimer is a highly useful strategy in which one heir renounces an inheritance in favor of another heir. Assuming family members cooperate, this can save taxes.

Here’s one example. Dad died and had a large traditional IRA that he left to Mom. She has enough assets and income to cover her expenses, and she lives in a state with a stiff estate tax. The inherited IRA would put her estate over the threshold.

Also surviving are three young-adult children. If Mom disclaims all or part of Dad’s IRA within nine months of his death, that amount could go directly to the children. They will have 10 years to empty the account, and the family as a whole will likely save estate and income taxes.

Disclaimers have many key details, especially regarding beneficiary documents. Although heirs have great freedom in choosing what assets to disclaim, the rules about who gets disclaimed property are rigid. It is best if the original owner names tiers of heirs so that if one disclaims, the next recipient is clear.

Stocks Are Already Responding To Post-Covid Pent-Up Demand. What You Need to Know.

The path to economic recovery is starting to clear.

Strong family financial planning can help reduce taxes and support younger generations. From intrafamily loans and asset gifts to inheritance disclaimers, strategic cooperation can create meaningful financial benefits—when families have the trust and structure to make it work.

Intrafamily loans

Asset gifts

Disclaimers