Planning Strategies During Market Volatility – Turning Defense Into Offense
Over the past several weeks, issues such as tariffs have sparked broader concerns regarding the economy and the potential for a recession. Given these concerns, markets have fallen, with the S&P 500 dropping more than 10% from its highs and into correction territory.
The market declines can be unsettling; however from a planning perspective, declines in asset values can also present opportunities to employ planning strategies that could better position you and your financial strategy for long-term success. These strategies can be particularly beneficial for higher-net-worth individuals or those with potentially taxable estates, as they can help mitigate future estate or income taxes. Below we outline several planning strategies that may help you take advantage of these declines and turn your strategy from defense to offense.
Gifting and Estate Tax Planning:
If you intend to pass your assets to individual beneficiaries and you may be subject to estate tax, there are a number of strategies that could be particularly beneficial during a down market. In 2025, the annual gift exclusion is $19,000 per donee per donor, and the federal lifetime estate and gift tax exemption is $13.99 million per individual.
Expectations are that the Tax Cuts and Jobs Act (TCJA) will be extended in full or in part, but if no changes are made, the lifetime exemption will sunset at the end of 2025, meaning the exemption would fall from $13.99 to approximately $7 million, adjusted for inflation. Thus, some gifting* and estate-planning strategies could be particularly valuable and timely during a down market, allowing you to transfer assets when values are down, helping maximize the value of your gift and potentially reducing future estate taxes. This would include the following strategies:
Gifting: Consider making gifts to individuals (or certain trusts for their benefit) up to the annual exclusion limit. And if you intend to use part or all of your gift tax exemption during your life, you may want to evaluate whether a down market may present an efficient time for such a gift. Transferring assets when values are down could allow you to either transfer more shares of investments within the annual exclusion amount or use less lifetime exemption for the gift.
Trust Strategies: Similar to the gifting strategy, transferring assets to an irrevocable trust when asset values are down could allow you to transfer more shares/assets or use less of your lifetime exemption, while still removing the future appreciation of those assets from your estate. These strategies are most beneficial for individuals who have federal or state estate tax concerns and are interested in gifting assets to individual beneficiaries.
Strategies including intentionally defective grantor trusts (IDGTs), spousal lifetime access trusts (SLATs), and grantor retained annuity trusts (GRATs) present planning opportunities for assets with decreased values. Funding IDGTs and SLATs during a market downturn allows for more efficient use of your lifetime exemption.
A GRAT would be primarily for individuals who anticipate federal estate tax liability and are interested in mitigating it by removing the appreciation of particular assets from their taxable estate. For example, if you have securities that have high growth potential, transferring them to a GRAT when asset values are down could remove some of the appreciation (and tax liability) from your estate during a recovery. However, assets that depreciate over the GRAT's term or assets without much growth are not efficient choices for funding, so this strategy requires careful consideration of the assets used to fund the GRAT.
And if you plan to transfer assets to more remote generations, such as grandchildren, consider making those gifts using your generation skipping transfer (GST) tax exemption during the down market to help optimize your exemption allocation.
Additional Tax-Planning Considerations:
In addition to the estate-planning strategies above, there are additional strategies you could consider during a down market that could help with taxes and tax planning.
Roth Conversions: When you convert assets from a Traditional IRA to a Roth IRA, you pay income taxes on the value of the assets being converted, so it's important to note that a Roth conversion will result in an increase in taxes. That said, performing a Roth conversion when asset prices are depressed could reduce the amount you have to pay in taxes, as you would be converting a lower portfolio value. This could then provide an opportunity for tax-free growth in your Roth as asset values recover.
Tax Loss Harvesting: While many people think about tax loss harvesting as something you do at the end of the year (when your overall tax liability may be clearer), you can tax loss harvest at any time. Recognizing capital losses could allow you to offset capital gains recognized throughout the year. Any excess capital losses are next used to reduce ordinary income by up to $3,000, with any remaining excess losses carried into future years to offset capital gains recognized in 2026 or later. This can also be a great opportunity if you find yourself needing to rebalance your portfolio.
Taking Control of Your Strategy
While none of us enjoy periods of market volatility, these fluctuations are a normal part of investing, and they can be used as an opportunity to better position your financial strategy for long-term success. Talk to your professional team, including your financial advisor, tax and legal professionals to see if the above strategies make sense for your situation.
*Consult your tax professional before gifting assets with values below your cost basis, as it may be more efficient to recognize the loss before making the gift.
Edward Jones, its employees and financial advisors cannot provide tax or legal advice. You should consult your attorney or qualified tax advisor regarding your situation.