Market Swings Open Estate Tax Window for Families

A falling market can feel like bad news on a portfolio app. For wealthy families, it can also open a tax window.

That is the odd logic behind a trust strategy now getting attention in the US. When share prices swing sharply, families can move assets in and out of certain trusts, while keeping the taxman’s rules satisfied.

For Indian readers, this is not a casual DIY idea. It matters most to families with US assets, overseas heirs, or complex estate plans. Still, the lesson is useful. Volatility does not only create trading opportunities. It can also change how wealth moves across generations.

Why trusts matter in volatile markets

The strategy centres on an irrevocable grantor trust. In plain English, that is a trust that cannot be freely cancelled, but still makes the person who created it pay the tax.

That sounds stiff, but the assets inside can move. If the trust allows substitution, the creator can swap one asset for another of equal value.

Ed Renn of Withers said this “asset swapping” often gets ignored. Many families set up trusts years ago, then stop managing them closely.

That is where markets matter. A stock worth $1 million last year may be worth $500,000 today. Another asset may have held steady. If both sides can support the valuation, a swap can change the tax result.

The core rule is simple. You cannot pull out something valuable and replace it with something weaker. The assets must match in value, and the family must prove that value if questioned.

This is why valuations matter. Listed shares are easier. Private company shares, real estate, or private equity need careful paperwork.

The step-up that heirs want

The biggest prize is something called a step-up in cost basis. It sounds technical, but the idea is simple.

Say someone bought shares long ago for $100,000. Those shares are now worth $1 million. If they sell, the tax system looks at the $900,000 gain.

In many US estate cases, heirs who inherit assets outside a trust can reset that purchase price to the market value at death. So the old gain may disappear for tax purposes.

Jere Doyle of BNY Wealth said families often use substitution powers when someone is closer to death. They may pull low-cost shares out of the trust and put cash or high-cost assets in.

That way, heirs may inherit the appreciated shares outside the trust. The cost basis then resets, which can reduce future capital gains tax.

Trusts face a sharper tax bite than individuals. The top US income tax rate of 37 percent applies to trusts after a much lower income level.

For 2026, trust income above roughly $16,000 can hit the top ordinary rate. Individuals reach that level only at far higher incomes.

Capital gains also become expensive faster inside trusts. Long-term capital gains can face the 20 percent rate at around $16,250 of trust income.

For a normal salary earner, these numbers sound tiny. That is exactly the point. A trust can hit top tax rates quickly.

Cash needs without selling shares

There is another practical reason to swap assets. Sometimes families need cash, but do not want to sell shares.

Robert Westley of Northern Trust said a family may feel stuck when wealth sits in illiquid or highly appreciated assets. Selling can trigger tax, or force a poor sale.

If the trust holds cash, the creator may transfer in an equal-value asset and take cash out. The trust still has value, but the family gets liquidity.

This can matter during rough markets. Promoters, business owners, or investors may not want to sell listed shares after a fall. They may also hold private assets that cannot move quickly.

Think of it like switching boxes in a storeroom. The trust must get a box of the same value. But the contents can change.

For Indian families with global assets, the emotional side is familiar. No one likes selling a good asset during panic. A trust swap can sometimes create breathing room.

Of course, this only works when the trust document permits it. The family also needs proper tax and legal advice.

Estate tax math becomes timing

The US estate tax exemption is $15 million per person in 2026, according to the Internal Revenue Service. Married couples can effectively protect more with planning.

Above the exemption, federal estate tax can go up to 40 percent. State-level taxes may add more in some cases.

Sara Wells of Morgan Lewis gave a simple example. If a $1 million stockholding falls to $500,000, a family could move that depressed asset into a trust.

If the stock later returns to $1 million, the future rise may sit outside the taxable estate. The family used only $500,000 of exemption when making the transfer.

This is why market falls can be useful in estate planning. The family is not celebrating losses. It is using lower values to move future growth away from estate tax.

Indian investors know this instinct from buying dips. Here, the dip is not about a quick trade. It is about where future gains will be taxed.

There is also a trust called a grantor retained annuity trust, or GRAT. It usually runs for a few years.

The person who creates it receives payments during the term. If the assets grow above a government-set hurdle rate, the extra value can pass to heirs with tax benefits.

But a GRAT needs growth to work. If the assets disappoint, they may come back to the creator’s estate.

Pam Lucina of Northern Trust said families may swap out highly appreciated assets when markets look risky. They can replace them with cash or steadier assets.

That is a defensive move. It protects gains already made, instead of waiting for volatility to eat them.

What Indian investors should watch

This story is US-focused, but the broader message travels well. Wealth planning is not only about picking stocks.

It is also about ownership, timing, tax rules, and family needs. For wealthy Indians with US exposure, these points can become very real.

Many Indian families now have children abroad, overseas properties, US brokerage accounts, or dollar assets. That creates cross-border estate questions.

A wrong structure can leave heirs with paperwork, tax bills, and delays. A careful structure can reduce friction when families are already dealing with loss.

For retail investors, the lesson is more modest. Do not copy trust strategies from rich families. But do understand that taxes shape real returns.

A 10 percent market move is not the whole story. What matters is what stays after tax, fees, currency moves, and family obligations.

Volatility makes most people nervous, and rightly so. But for families with serious wealth, it also forces a useful question. Are the assets only invested well, or are they owned wisely too?