Your estate can benefit from a refresh every now and then. And that includes how you manage your portfolio in a down market. Stocks are declining as worries about tariffs and a potential recession loom large. But for those with an estate they want to pass on to heirs, the declines can spell opportunity.
“Assuming that the markets will recover we are able to transfer a lot of assets outside the estate at discounted dollars,” says Howard Sharfman, senior managing director at NFP Insurance Solutions. “There are many ways to use a temporary disclostion to benefit.”
From gifting to charities and heirs to engaging in a Roth IRA or Roth 401(K) conversion, here’s how you and your estate can benefit in market downturns, granted they come back up.
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With stocks down, amp up your gifting
For 2025, the Internal Revenue Service allows individuals to give up to $19,000 and couples to give up to $38,000 without paying the gift tax or using any gift tax exemption. You may make as many gifts as you want within those limits. In addition, each person can give up to $13.99 million during his or her lifetime (or at death), free of gift and estate tax. When the markets are down, you can gift more stock within the annual tax-free limit, enabling your heirs to benefit from future rebounds in the market.
After all, while stocks are down now, they tend to appreciate again over the long run. “You can give away more assets worth less under the hope they will grow in value,” says David Handler, a partner in the trust and estate group at Kirkland & Ellis.
There are several ways to gift your heirs more assets in a down market, including an irrevocable trust, a Grantor Retained Annuity Trust (GRAT) or a Donor-Advised Fund (DAF). While irrevocable trusts are relatively straightforward, fewer people know about the other two options.
Grantor Retained Annuity Trust (GRAT): This estate planning tool enables you to avoid using the lifetime gift and estate exclusion, which in 2025 is $13.99 million. A GRAT creates an irrevocable trust to hold the assets you are gifting. Each year, an annuity is paid out for a predetermined period, and the excesses are passed on to your heirs gift-tax-free.
Let’s say you own $2 million worth of Tesla shares and believe the stock slump is short-lived and will appreciate in the coming years. You want to transfer that future growth to your heirs and create a two-year GRAT that holds the $2 million worth of Tesla shares.
The annuity payments you get over the two years will equal the initial value of the gift plus interest at the IRS's assumed growth rate. If the value of the stock in the GRAT rises above the assumed growth rate, that excess return is transferred to your heirs gift-tax-free.
“You have to do it while the value is low,” says Handler. “If the stock market rose 500 points, you missed the opportunity.” Remember that just because a stock is low, there is no guarantee it will go back up. In that scenario, there won’t be anything to pass along to heirs.
Donor Advised Fund (DAF): A DAF is a charitable giving vehicle in which you contribute assets, get a tax deduction and then have a say in grants going to qualified charities. You can donate stocks, cash, real estate and even cryptocurrency.
Using a DAF, you can donate stocks at a lower price and get a charitable deduction on the current fair market value. If the stock recovers, the assets in the DAF grow tax-free, which means a larger future gift for the charity.
This strategy only works if your main goal is to give charities something that has the potential to appreciate. If you are more focused on the tax deduction, donating when assets are richly valued is a better move.
Roth conversions
A Roth conversion occurs when you move funds from a traditional IRA, 401(K) or 403(b) into a Roth IRA or Roth 401(k). In other words, you are transforming a "traditional" investment into a "Roth" investment. In a down market, you can convert assets at a lower tax cost because they are worth less and benefit from tax-free growth when the markets turn around. With a Roth IRA or Roth 401(K), contributions are made with after-tax dollars, but withdrawals are tax-free (with some exceptions).
Let’s say you planned to convert $100,000 worth of stocks out of a traditional 401(k) into a Roth 401(k), but when you do the conversion, the value of the stock has fallen to $70,000. You pay 30% less in taxes with the conversion, and if and when the stock market rebounds, all future gains are tax-free. Plus, with a Roth IRA or Roth 401(k), there are no Required Minimum Distributions (RMDs), which means your money can grow tax-free for however long you need it to.
“For any clients that have a Roth conversion on the table for 2025, now is a great time to consider doing it,” says Will O’Rourke, a financial adviser at Prime Capital Financial. “Roth money is the best thing to travel through an estate.”
Tax loss harvesting
Tax loss harvesting occurs when you offset gains with losing investments to reduce your capital gains exposure. By pairing a winning and losing stock there won’t be any gains subject to the capital gains tax. If your losses exceed your capital gains you can use up to $3,000 to offset income per year. Losses beyond that can be used in future years. Be aware of the “wash” rule. You can’t repurchase the same or similar security within thirty days before or after.
To prevent yourself from being out of a stock you love for thirty days in a volatile market where losses can quickly turn into gains, Sharfman says to select another stock to purchase that tends to move the same as the one you sold. Take AI chipmaker Nvidia for one example. If you use that for tax loss harvesting and don’t want to wait thirty days, you can purchase shares of, say, Google or Microsoft, which tend to move in the same direction as Nvidia.
Don't go it alone
At the end of the day, it’s best to speak with your financial adviser if you have one. While you can DIY estate planning, there are many moving parts and different tax implications based on the strategy you employ.
“No one ever got poor paying for good advice,” said Sharfman. “This is a great area to pay for advice.”
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