Turning Downturns Into Opportunity: Recession-Era Strategies for Gift and Estate Tax Planning

Forbes

07-04-2025

Investment, Economy, Change, Success, Loss
When markets falter, many investors instinctively tighten their grip on their wealth, waiting for stability to return. But for high-net-worth individuals and families with long-term goals, a declining market is not merely a time to endure—it is a rare opportunity to act. From a gift and estate tax planning perspective, economic downturns offer unique leverage, allowing clients to transfer wealth more efficiently, reduce estate tax exposure, and position themselves for significant long-term advantage.
The IRS values gifts at their fair market value at the time of the transfer. When the market is down, that valuation—along with the gift tax cost—is lower. This means that more wealth can be moved out of an estate while using less of the lifetime gift and estate tax exemption, which currently stands at $13.61 million per person in 2024. That exemption, however, is set to be cut in half when the provisions of the 2017 Tax Cuts and Jobs Act expire after 2025. Acting now allows families to lock in the higher exemption amount while transferring assets that may appreciate significantly in a market recovery.
In practice, this might mean gifting marketable securities, closely held business interests, real estate, or even fractional interests in art or collectibles. Gifting directly to heirs is the simplest approach, but many families are better served by gifting to irrevocable trusts—particularly grantor trusts, which allow the client to continue paying income taxes on trust earnings, further reducing their taxable estate.
Another compelling strategy in a down market is the use of Grantor Retained Annuity Trusts (GRATs), which allow clients to 'loan' assets to a trust and receive annuity payments back over time. If the assets appreciate beyond a modest IRS hurdle rate, that appreciation passes to beneficiaries gift-tax free. A market recovery following a recession can produce exactly the kind of returns that make GRATs effective. Similarly, Intentionally Defective Grantor Trusts (IDGTs) enable clients to sell assets to the trust in exchange for a promissory note, freezing asset value for estate tax purposes while transferring future appreciation out of the estate.
Depressed values also create powerful opportunities to use intra-family loans. Interest rates, while rising, remain historically low. By lending funds or selling assets to a family member or trust, the appreciation above the interest rate accrues to the next generation. For clients with shorter life expectancies, more advanced tools such as self-canceling installment notes or private annuities may be appropriate, removing large values from the estate without triggering gift tax.
For clients who have already funded irrevocable grantor trusts, now is a good time to consider asset substitution. This technique involves exchanging low-basis assets held personally for high-basis assets inside the trust. Doing so allows clients to reclaim assets that will benefit from a step-up in basis at death while moving appreciating assets outside of their estate.
The income tax side of planning also holds opportunities. Converting traditional IRAs to Roth IRAs during a market downturn allows clients to pay income tax on a reduced value today in exchange for future tax-free growth. For those anticipating higher tax rates in the future—either personally or for their heirs—Roth conversions offer a smart way to reposition retirement assets while reducing estate size.
Charitable strategies can also be tailored to periods of economic uncertainty. A Charitable Lead Trust (CLT), for instance, allows a client to provide an income stream to a charitable organization over a set number of years, with the remainder interest going to family members. When values are low and expected to rebound, the long-term appreciation can pass to heirs with little or no estate tax. For clients over 70½, Qualified Charitable Distributions (QCDs) from IRAs can help satisfy required minimum distributions in a tax-efficient manner. Donor-Advised Funds (DAFs) also remain effective vehicles for front-loading charitable giving, particularly in years where inflation has driven up taxable income.
Economic downturns often reduce the appraised value of business interests, real estate, and hard-to-value assets like collections. This makes it an ideal time to transfer interests in family limited partnerships or LLCs to younger generations. When coupled with discounts for lack of control and lack of marketability, these transfers can be deeply leveraged for tax efficiency. Clients who hold alternative assets such as artwork or rare books should consider entity ownership structures that facilitate fractional interest gifting and valuation discounts while preserving management control.
But technical strategies are only part of the picture. Recessions serve as a wake-up call to revisit the fundamentals of the estate plan itself. Clients should reassess whether their plan reflects current values, family dynamics, and liquidity needs—especially with regard to how estate taxes would be paid. Fiduciaries should be reviewed for suitability, and clients should consider whether distribution provisions remain appropriate in light of changed circumstances.
Life insurance planning also deserves renewed attention. In volatile markets, life insurance can offer a dependable source of liquidity to pay estate taxes or support heirs. Premium financing arrangements, particularly in conjunction with spousal lifetime access trusts (SLATs), can create flexible, tax-efficient structures that preserve estate liquidity without tying up large amounts of cash.
These strategies are not merely reactive—they are proactive, long-range moves that take advantage of a downturn to build resilience, flexibility, and legacy. When valuations are low, volatility is high, and uncertainty looms, families willing to act decisively can transfer wealth on exceptionally favorable terms.
Too often, advisors and clients focus only on preservation during difficult economic times. But for those with a multi-generational outlook, recessions are windows of opportunity—fleeting moments where decisive planning can yield decades of benefit. In estate and gift tax planning, timing is everything, and the time to act is often when others are standing still.