How To Turn Downturns Into Generational Wealth

Financial Advisor Magazine- From January 20, 2025, when the second Trump administration began, until April 4, 2025, the Dow Jones Industrial Average has fallen 12% with U.S. stock markets losing $5 Trillion in value in the last three weeks alone.   Based on the Shiller P/E Ratio, the markets, now at approximately 30, could fall another 30% to 22 on the Shiller P/E Ratio scale before finding a floor. Despite this, historically, the stock market does recover its value over time.  In the meantime, the decline in value is an opportunity for estate planners.

Periods of market volatility—whether driven by inflation, recession or global disruption—can feel like times to delay estate planning decisions. But for estate planners serving ultra-high-net-worth (UHNW) families, these economic contractions are windows of opportunity. Depressed asset values and low interest rates open the door to a range of powerful estate planning strategies that can transfer substantial wealth to future generations at a reduced tax cost.

In short, down markets offer a chance to "coil the spring" of asset value growth and shift it out of the taxable estate—tax-free—before the rebound. For those willing to act strategically, the gains can be profound.

Gifting In A Down Market: A Simple Yet Powerful Lever
Under IRC §2512, gift tax is based on fair market value at the time of the gift. So when asset prices decline, the same amount of wealth can be transferred using less of the lifetime exemption—or even without triggering gift taxes at all. If those assets rebound later, the appreciation accrues to the next generation entirely outside the donor’s estate.

This approach is particularly compelling for hard-to-value assets like family-owned businesses, real estate and collectibles. Valuation discounts—especially for fractional or minority interests—can amplify the leverage. Practitioners frequently employ defined value clauses Wandry v. Comm’r, T.C. Memo 2012-88 to mitigate audit risk, and allocate Generation Skipping Transfer (GST) exemption when trusts for grandchildren are involved.

GRATs: Estate Freeze Meets Market Recovery
The Grantor Retained Annuity Trust (GRAT) is uniquely suited for down markets. Structured properly, a GRAT can transfer all post-annuity appreciation to heirs gift-tax free, provided that growth exceeds the IRS §7520 rate.

Take advantage of low valuations to “zero out” the taxable gift, and if the assets appreciate—particularly family LLC interests or collectibles expected to recover—any excess flows to heirs outside the estate. If values don’t recover, the GRAT simply returns the property to the grantor, creating a no-harm, no-tax scenario.

Short-term “rolling GRATs” are a popular method to manage mortality risk and maximize effectiveness, though they have been the target of tax reform proposals by Bernie Sanders and Elizabeth Warren, so that a GRAT with a term of 10 years or longer may be safest.

Sales To IDGTs: Tax-Free Freeze And Flexibility

A sale to an Intentionally Defective Grantor Trust (IDGT) lets the grantor freeze the estate’s value by exchanging appreciating assets for a promissory note. The grantor pays no capital gains tax on the sale and all future appreciation escapes estate taxation.

Unlike a GRAT, an IDGT allows allocation of GST exemption upfront, enabling dynasty trust planning. It also allows more flexibility in note structure. Using the Applicable Federal Rates (AFR)—often lower than the §7520 rate—the “hurdle” to success is smaller than with a GRAT.

SCINs And Private Annuities: Mortality-Based Techniques
For senior clients in uncertain health, Self-Cancelling Installment Notes (SCINs) and private annuities provide ways to shift value without using exemption. If the seller dies during the term, unpaid balances cancel and avoid estate inclusion. The IRS requires actuarial adjustments to avoid classification as a partial gift (e.g., Costanza v. Commissioner, 320 F.3d 595). The estate may recognize income, but total taxes are usually less than estate tax on the full asset.

These tools must be approached with caution and are best suited when estate liquidity is needed but lifetime gifting capacity is low.

Substitution Powers For Basis Management
In grantor trusts, IRC §675(4)(C) allows the grantor to swap assets of equal value. Before death, swapping low-basis assets back into the estate ensures a basis step-up, so avoiding capital gains tax for heirs.

This is a nuanced but potent way to reduce future income tax liability while keeping estate inclusion tightly managed. The substitution powers—when properly drafted—do not cause estate inclusion.

Family Entities And Valuation Discounts
Forming a Family Limited Partnership (FLP) or Family Limited Liability Company (FLLC) during a downturn can compound the transfer advantage. Valuation discounts for lack of control and marketability are more defensible when markets are distressed. Court decisions such as Estate of Elkins v. Comm’r, 767 F.3d 443, support significant discounts even for fractional ownership of artwork.

Care must be taken to avoid §2036 inclusion—especially if the senior generation retains control or personal benefit from the entity (see Estate of Powell v. Comm’r, 148 T.C. 392).

Roth IRA Conversions: Tax Bracket Arbitrage
While not a transfer per se, Roth IRA conversions during downturns allow clients to pay income tax on lower values, reducing their taxable estate while converting tax-deferred growth into tax-free assets.

For example, a $10M IRA that drops to $6M can be converted now with $2M in tax paid. If the account rebounds to $10M, heirs withdraw the entire amount tax-free, avoiding both income and estate tax layers.

Charitable Lead Trusts: Philanthropy Plus Leverage
A Charitable Lead Annuity Trust (CLAT), when structured at low §7520 rates, allows UHNW donors to lock in large charitable deductions and pass residual growth to family with minimal or zero gift tax. This strategy is particularly potent when funding family foundations or meeting multi-year philanthropic pledges during economic contraction.

Grantor or non-grantor CLATs can be structured depending on income tax objectives, but both serve to maximize family benefit from market recovery.

Premium Financed Life Insurance: Leveraging Liquidity
In a tight liquidity environment, premium-financed life insurance inside a SLAT or ILIT allows clients to obtain large death benefits without large upfront gifts. Banks lend the premium, collateralized by the policy; the trust repays via death benefit or future liquidity events. The result: a net estate reduction with minimal out-of-pocket cost, provided interest rates remain manageable.

Court rulings like Estate of Levine v. Comm’r, T.C. Memo 2022-15, have upheld sophisticated insurance structures when formalities are followed.

Conclusion: Plan Boldly, But Plan Carefully
Volatile markets favor the well-prepared. For UHNW clients, these economic cycles offer some of the most tax-efficient opportunities to transfer wealth, lock in appreciation, and secure legacy plans. But execution matters: the strategies outlined here demand precision, documentation and rigorous compliance with tax law and case precedent.

A seasoned estate planner, working with valuation experts, CPAs and fiduciaries, can ensure that downturns become defining moments in the family's generational wealth strategy—not missed opportunities.