Volatile markets often cause investors to batten down the hatches and hold onto their wealth, waiting for things to settle down. However, if your goals are long-term, there are estate planning moves to make when times are uncertain. A recent article from Forbes, “Turning Downturns into Opportunity: Recession-Era Strategies for Gift and Estate Tax Planning,” explains the opportunities presented.
Gifts are valued by the IRS at their fair market value when they are transferred. If the market is down, the valuation and the gift tax cost is lower. More wealth may be moved out of an estate, while using less of the lifetime gift and estate tax exemption. The exemption is currently high. However, it may be cut in half if the Tax Cuts and Jobs Act expires at the end of this year. For a wealthy family, now is the time to lock in the higher exemption amount and transfer assets that may appreciate in a recovery.
This could mean gifting marketable securities, closely held business interests, fractional interests in art or collectables, or real estate property. Gifting directly to heirs should be considered. Ask your estate planning attorney if it makes sense to gift to irrevocable trusts right now, and to gift to grantor trusts, which lets you continue paying income taxes on trust earnings, which serves to reduce your taxable estate further.
Another popular strategy in a down market is the Grantor Retained Annuity Trust. This trust lets you “loan” assets to a trust, while receiving annuity payments over time. If the assets grow beyond an IRS rate, the appreciation passes to beneficiaries with no gift tax. Intentionally Defective Grantor Trusts are also something to discuss with your estate planning attorney. The IDGT allows you to sell assets to the trust in exchange for a promissory note. This serves to freeze asset value for estate tax purposes and, at the same time, transfers future appreciation out of your estate.
For families with significant assets, depressed values can also prompt the use of intra-family loans. Interest rates are still relatively low, even if they have risen recently. Selling assets or lending funds to a family member or a trust allows the appreciation above the interest rate to accrue to the next generation.
If you have already created and funded an Irrevocable Grantor Trust, you may want to consider asset substitutions. By exchanging low-basis assets held personally for high-basis assets inside the trust, you could reclaim assets benefitting from a step-up at basis at death, at the same time you’d be moving appreciating assets outside of your estate.
These are not do-it-yourself strategies and must consider your estate plan and financial situation. Review them with your estate planning attorney to learn if they are right for you and if there are other strategies to be considered.
Reference: Forbes (April 7, 2025) “Turning Downturns Into Opportunity: Recession-Era Strategies For Gift And Estate Tax Planning”