The S&P 500 index peaked in mid-February. Since that time, the stock market has experienced a significant decline. Although market corrections are not unusual, volatility can be concerning. No one has a crystal ball to predict how the market will react, especially in the short term, but the decrease in stock values can provide valuable long-term planning opportunities.

Gifting

If assets are gifted during a market downturn, future appreciation in the assets will escape taxes. That makes for more effective use of the combined lifetime gift and estate tax exclusion amount (currently $13.99 million for an individual, $27.98 million for a married couple).

Make annual exclusion gifts earlier

In 2025, an individual can gift $19,000 to as many people as they desire. Annual exclusion gifts do not reduce the donor’s combined lifetime gift and estate tax exemption amount and are a “use it or lose it” tax benefit. Gifting assets that have declined due to a market decline may allow these gifts to appreciate and provide a greater benefit to the recipient. Rather than waiting until the end of the year to make annual exclusion gifts, it may make sense to gift now. That way, if the market rebounds soon, more assets will be removed from your estate without use of any gift or estate tax exemption amounts.

Grantor retained annuity trusts (GRATs) as an estate freeze technique

GRATs can be funded with assets that have decreased in value but have strong growth potential. All future growth in the assets will escape estate tax. GRATs can be structured as a zeroed-out GRAT which means it will not use up the grantor’s combined lifetime gift and estate tax exemption amount. Other than legal fees, there is little risk in using a zeroed-out GRAT because if the assets do not appreciate as expected, the GRAT simply terminates and a new zeroed-out GRAT can be created. This can be done over and over again until a market upswing allows the GRAT to achieve its desired estate tax savings objective.

Sales to intentionally defective grantor trusts (IDGTs)

Similar to GRATs, sales to irrevocable IDGTs take the appreciation on assets out of a grantor’s estate. Unlike GRATs, IDGTs will use up part of the grantor’s lifetime gift and estate tax exemption amount. However, IDGTs generally use a lower “hurdle” rate than GRATs which means assets do not have to appreciate as much to provide an estate tax benefit. IDGTs are also more efficient than GRATs for multi-generational estate tax planning.

Tax loss harvesting

Stocks with unrealized losses can be sold to lock-in losses for income tax purposes. The stock can be repurchased after the wash sales timeline has expired or similar (but not identical) stocks can be purchased to replace the asset that was sold to try to catch a market rebound. This can provide valuable tax benefits during volatile markets.

Roth IRA conversions

Converting a portion of a traditional IRA to a Roth IRA can be beneficial during market downturns. The converted assets will be taxed at the lower value and, if the market rebounds, the tax-advantaged Roth IRA will benefit from the increase in value.

Incentive stock options (ISOs)

A market downturn may be a time to consider exercising ISOs. If exercised, future growth in the ISOs will be taxed as capital gain rather than ordinary income (provided the mandatory holding periods are satisfied).1 Care should be taken because the exercise of ISOs can trigger alternative minimum tax (AMT), but if stock prices are lower more options can be exercised.

Alternate valuation date

When a person dies, assets in their estate are typically valued as of the date of their death. However, when a market downturn occurs, a special election can be made to value the estate assets six months after the date of death. For estates subject to estate tax, this special election can reduce estate tax liability.

Lock in GRAT gains

GRATs are grantor trusts for income tax purposes. One of the most common ways to establish a grantor trust is to allow the grantor to substitute assets of equal value with the GRAT. This is generally referred to as a “swap” power. For GRATs that have appreciated but are subject to market volatility, the grantor may want to exercise their swap power to substitute less volatile assets into the GRAT thereby locking-in the GRAT gains.

Spousal lifetime access trusts (SLATs) and dynasty trusts

SLATs and dynasty trusts can also be created as grantor trusts for income tax purposes. If the trusts are funded with assets that are not performing as expected, the grantor can use their swap power to substitute assets into the trust that have better long-term growth potential.

Volatile markets are never fun, but they provide an opportunity to maximize the use of gift tax exclusions, reduce taxable estates, and reduce income taxes. They are also excellent times to reassess risk parameters and asset allocation. Before engaging in any planning strategy, it is essential to consult with a qualified professional. This analysis should include updating your financial plan to illustrate how potential planning could impact your long-term financial health.

  1. Two years from the grant and one year from the exercise date. ↩︎

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