Wealth Insights

Estate planning strategies during volatile markets

Four specific strategies that clients can use to take advantage of market uncertainty and reduced asset values to pursue tax and estate planning goals.

It ticks up with a bumpy rise. You ride toward the peak with great anticipation. You reach the top, take in the view if only momentarily, then the free fall begins. You are whipped around the ups and downs, highs and lows, and sometimes thrown for a loop.

The volatility of the past few years has reached a fever-pitch with the news of tariffs and continued uncertainty of geopolitical conflict leaving many with stock-market whiplash – and asking one key question:

What can I do to ride out these various volatility waves?

Regions Private Wealth Management provides white papers and commentary designed to educate clients on estate planning and financial strategies during all phases of life.

“Inflation, interest rates, geopolitical issues, and domestic political issues… There is a lot going on in the world that is causing volatility in the markets,” said Wyeth Greene, CFP®, Private Wealth Planner at Regions. “There are strategies that you can deploy during market drops and rallies to provide a long-term benefit.”

Greene shares four specific strategies that investors can use to take advantage of market uncertainty and reduced asset values to pursue tax and estate planning goals.

1. Is a Roth conversion right for you?

For individuals considering a Roth IRA conversion, doing so during reduced market values in which asset prices have dropped may mean lower ordinary income tax due at the time of conversion.

“A Roth provides a lot of opportunity for tax-free income during retirement, and some individuals don’t really need the income from required minimum distributions (RMDs), which are taxed,” notes Greene. “Converting means you are no longer required to take minimum distributions and your investment grows tax-free.”

But there are a few considerations.

“Once you convert from a qualified retirement account, you will pay ordinary income taxes on the amount converted, but from that day forward any growth, withdrawals or passing to heirs will be forever income tax-free,” Greene says. However, he does note that, “there are a lot of things to consider; it may not always be the best fit.”

For example, Greene explains that based on an individual’s age and time horizon, there may not be enough time to break even from the tax they would pay today to do the conversion – or perhaps they don’t have heirs that would benefit from the income tax-free inheritance.

Other important considerations are the five-year rule and how to pay the tax bill upon conversion.

“If you do a conversion, you don’t want to take the money out earlier than five years,” notes Greene. “This is because withdrawals from the Roth IRA may be subject to taxes and penalties if the account has not been owned for at least five years. You also need to make sure you have assets other than the converted money to pay the taxes owed.”

Finally, it is important to consider tax rates now compared to what you expect during retirement.

“If your tax rate is high today and you expect that to be significantly lower in the future, you may not want to do a conversion. We just don’t know where taxes are going, so having some differentiation in assets in retirement can be beneficial.”

2. Stock options: To exercise – or not to exercise?

That is the question for many who own stock options.

Many employers offer equity compensation in the form of Non-Qualified Stock Options (NSOs). Timing when to exercise these options can be tricky, as doing so may result in ordinary income tax on the spread between the strike price or exercise price and the current fair market value.

Volatile markets, specifically when there has been a drop in market values, may offer an excellent opportunity to consider exercising.

“If you are considering selling some of your stock options in a depressed market, that spread will be lower,” Greene says. “You decrease your ordinary income tax burden by exercising while the value is lower.”

The benefit to the employee is that they have the option to purchase, or ‘exercise,’ shares at this price which may be lower than the current fair market price. However, when the shares are exercised, ordinary income taxes are due on the difference between the fair market price and the strike price. The benefit of exercising during a period of market decline includes a potential reduction of income tax liability and additional ownership in the stock for which options were exercised.

Once exercised, the employee now owns these shares, and can choose whether to sell them immediately or hold them long term.

For example, if XYZ, Inc. grants 1,000 shares at $5, and the employee decides to exercise these shares when the stock is valued at $10, ordinary income will be due on $5,000 ($10,000 Fair Market Value - $5,000 Exercise Price).

For employees of companies that have strong fundamentals and are poised for long-term growth, a temporary market decline may offer a good opportunity to engage in an analysis of their current stock options to determine if exercise is prudent.

3. Gifting to reduce the estate tax burden

For individuals interested in gifting assets to family or other beneficiaries during their lifetime, the implementation of an outright gift may be an effective strategy during a market downturn.

Gifts may be in the form of business interest, stock, mutual funds, real estate, or other assets that may be subject to value fluctuation. When a gifting strategy is executed based upon a reduced value, the amount of lifetime gift tax exemption used will also be reduced. Moreover, future growth of the gifted assets may be removed from one’s estate for a lower cost.

The 2025 lifetime exemption amount is $13.99 million per individual, or $27.98 million for a married couple. Once the lifetime exemption is exhausted, any gifts made are subject to a tax rate of 40%. In addition to the lifetime exemption, each person is allotted an annual gift tax exclusion of $19,000 per donor to each individual for whom a gift is made. A married couple can therefore make gifts of $38,000 per recipient in a given year without having to file a gift tax return. For gifts that exceed this exclusion amount, the taxpayer must file a gift tax return (Form 709) even if gift tax is not due.

Greene notes, “For those who would like to gift assets to family or other beneficiaries during their lifetime, the implementation of an outright gift may be an effective strategy during a market downturn. If assets, such as stocks, and bonds, etc. have decreased in value and you gift today, you are reducing the estate’s tax burden while allowing for future growth outside of the estate.”

Individuals interested in making a significant gift, should engage in a gifting analysis as part of their wealth plan. This analysis can measure the potential impact the gift will have based upon the depressed value provided and potential appreciation beneficiaries may receive.

4. Is it time for a substitution?

Market volatility does not only consist of downturns. There are also strategies that can be employed to take advantage of sudden increases in asset values. One such strategy is known as the power of substitution.

“The power of substitution is a privilege that grantor trusts offer, allowing the grantor to swap assets out of the trust for assets in the trust if equal in fair market value,” explains Greene.

A grantor trust is designed to reduce estate taxes and benefit heirs. And leveraging the substitution powers of this type of trust is another way to take advantage of current market uncertainty. This can be strategic if an asset currently held in trust has increased substantially in value.

If left in trust, the asset will not receive a stepped-up basis upon the grantor’s death, meaning the beneficiary will be stuck with the grantor’s original cost basis. However, if the appreciated trust asset is removed from the trust, and replaced with cash of equal value, the appreciated asset is now in the name of the grantor individually and can receive a stepped-up cost basis upon the grantor’s death.

“A lot of our clients are wondering what, if anything, they should be doing in a volatile market,” says Greene. “These are just a few strategies that can be employed in the interim as we await more stable market cycles.”

If you have questions about your estate planning strategy as you navigate these turbulent waters, a Regions Wealth Advisor can introduce you to the Regions Wealth Planning group to help you understand your options, and work with you in reaching your financial goals.

Talk to your Regions Wealth Advisor about:

1. Your preferences for regular meetings about your portfolio.
2. How to receive Regions Asset Management weekly market commentary.

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