Contributed by: Brian Sak, CFP®, CLU®, ChFC®
Market volatility is often discussed as an investment concern. From an estate planning perspective, it is more accurately a valuation event. When asset prices fluctuate, the cost of transferring wealth changes, sometimes dramatically. For families with taxable estates, these periods can create opportunities to improve long term outcomes if they are deliberately approached.
As of 2026, the federal estate and gift tax exemption remains historically high at $15,000,000 per individual and $30,000,000 for married couples, with a top transfer tax rate of forty percent. The annual gift tax exclusion is $19,000 per recipient, or $38,000 for married couples who elect gift splitting. While these thresholds provide meaningful planning capacity today, their durability remains uncertain, and their effectiveness depends heavily on timing and asset selection.
Volatility does not change the rules of estate planning. It changes the economics.
Why Volatility Alters the Estate Planning Tradeoff
Estate and gift taxes are based on fair market value at the time of transfer, not long-term potential. When markets experience drawdowns, valuations often fall faster than underlying fundamentals. Transferring assets during these periods can permanently reduce estate tax exposure while allowing future recovery to occur outside the taxable estate.
At the same time, income tax rules operate differently. Assets included in an estate generally receive a market value adjustment at death, eliminating unrealized capital gains for heirs. Assets transferred during life do not. This creates a fundamental tradeoff: retain assets for income tax efficiency, or transfer assets to reduce estate tax exposure.
Volatility narrows this gap. When values are temporarily depressed, the estate tax cost of transferring assets declines, while the loss of a future market value adjustment becomes less significant relative to expected appreciation. This dynamic often favors action over delay.
Gifting Strategies That Benefit From Volatile Markets
Lower valuations increase the efficiency of both incremental and larger scale gifting strategies.
Annual exclusion gifts remain a practical foundation. While modest in isolation, consistent use across multiple beneficiaries and years can meaningfully reduce a taxable estate. During periods of market weakness, these gifts represent a larger percentage transfer of underlying value without using lifetime exemption.
Lifetime exemption gifts become more compelling when valuations are compressed. The benefit lies not in the exemption itself, but in removing all future appreciation from the estate. Assets with strong long term growth potential, such as operating businesses, private investments, or concentrated equity positions, are often well suited for this approach when markets are unsettled.
Where appropriate, valuation discounts for closely held interests may further enhance efficiency, particularly when supported by credible and conservative appraisal assumptions during volatile conditions.
Asset Location Planning and the Capital Gains Question
Volatility sharpens the importance of where assets are held, not just how much is transferred.
Assets retained until death may benefit from a market value adjustment that eliminates built in capital gains. Retaining highly appreciated assets can therefore reduce income tax for heirs, but it also increases exposure to estate tax. Transferring assets during life reduces estate tax risk but forfeits that adjustment.
When asset values decline, this tradeoff shifts. The estate tax cost of transferring assets falls, while much of the appreciation that would have benefited from a market value adjustment has yet to occur. This often makes it more efficient to move high growth, tax inefficient assets outside the taxable estate during volatile periods, even if that means accepting future capital gains exposure.
Lower growth assets, income-oriented holdings, or assets with significant embedded gains may be better retained personally, where a future market value adjustment could outweigh estate tax savings.
This framework also extends to retirement assets. Roth conversions can play an important role in asset location strategy during volatile markets. Converting traditional retirement assets when account values are temporarily depressed reduces the immediate income tax cost of conversion while creating tax free growth for heirs. From an estate planning standpoint, Roth assets often integrate more cleanly with trust-based strategies than traditional retirement accounts, particularly when income tax rates are expected to rise over time.
Asset location planning is not about minimizing one tax in isolation. It is about coordinating multiple taxes across generations.
Substitution Powers and Preserving Flexibility
One of the most effective tools for managing capital gains versus estate tax tradeoff over time is the substitution power in a properly structured grantor trust.
Substitution powers allow a grantor to exchange assets inside a trust for assets of equivalent value without triggering income or transfer taxes. This flexibility is especially valuable in volatile markets, where asset values and tax priorities evolve.
Early in a planning strategy, substitution powers allow depressed, high growth assets to be positioned inside trusts so that future appreciation occurs outside the taxable estate. As those assets recover and accumulate unrealized gains, substitution powers preserve the ability to move them back into the estate, restoring eligibility for a market value adjustment if circumstances warrant.
This approach avoids locking in decisions based on assumptions that may not hold. It allows estate plans to adapt alongside markets, investment strategies, and tax policy, without undoing completed gifts or consuming additional exemption.
When implemented correctly, substitution powers preserve control without undermining the estate planning objectives they are designed to support.
Legislative Uncertainty and the Cost of Waiting
While current exemption levels remain favorable, estate tax reform continues to resurface in policy discussions. Potential changes could include lower exemptions, modified valuation rules, or limits on multigenerational planning. No changes are guaranteed, but uncertainty itself is a planning variable.
Importantly, gifts made under current exemption levels are not expected to be penalized retroactively if exemptions are reduced in the future. This creates an asymmetrical decision. Acting now can reduce future estate tax exposure, while waiting primarily increases the risk of fewer options later.
Volatility amplifies this asymmetry by lowering the transfer cost at the same time uncertainty increases the cost of delay.
Execution Determines Results
Estate planning during volatile markets is only effective when implementation is precise. Valuations must be defensible. Trust structures must balance flexibility with compliance. Asset location decisions must align with liquidity needs, investment policy, and family considerations.
This is not a single decision, but an ongoing process that benefits from coordination across tax planning, investment management, and family governance.
Closing Perspective
Market volatility does not simplify estate planning. It clarifies priorities.
Lower valuations reduce the cost of transferring assets. Asset location determines where future growth is taxed. Substitution powers preserve flexibility as conditions change. Roth conversions address income tax exposure before it becomes unavoidable.
The opportunity is not created by uncertainty. It is revealed by it.