Is Today (somewhat) Perfect for Estate Tax Planning?

The global Coronavirus (“COVID-19”) pandemic effectively wiped out two-years of S&P 500 stock market gains and thereby devastated 401ks for anyone near retirement, led to record setting unemployment filings of 3.28 million (not a good record to set), and the largest U.S. stimulus package ever at over $2 trillion (new record setting national debt) to name only a few. Economies everywhere are suffering and today is not a great time for businesses, consumers, or most anyone for that matter. However, our firm is objective in our analyses and believes it’s our duty to address a highly beneficial strategic planning opportunity for estate and gift tax planning.

Estate and gift taxes are imposed by the Federal government on the transfer of property from one person to another when the original holder of the property is either alive (gift tax) or deceased (estate tax). Following the Tax Cuts and Jobs Act of 2017 (“TCJA”), the estate and gift tax exemptions were raised from $5.49 million per person to $11.18 million per person for the period of 2018 – 2025. More than likely, the gift tax exemption will return to a lower level following its expiration in 2025 since this was a major talking point among Democratic presidential candidates. On the one hand, most of us won’t have to worry about exceeding either the pre- or post-TCJA wealth exemptions so this may not appear to be of interest. On the other hand, those with wealth in excess of this threshold, as well as those with more modest holdings, may still see significant benefits from strategic estate and gift tax planning during the COVID-19 pandemic.

In order to transfer property (or equity holdings) from one person to another, you’ll need to obtain a detailed valuation report the conforms to IRS Revenue Ruling 59-60 guidelines as an accompanying document to IRS Form 709. You may be thinking, “why would I want to get a business valuation after you just told me the stock market and economy are terribly depressed?”. Well, today’s depressed asset values are precisely why you’ll benefit today.

A valuator needs to consider the information that is known or knowable as of the valuation date when developing and supporting their conclusion of fair market value for a detailed valuation report. Considering everything that’s happened since COVID-19 was first reported in the U.S. media on December 31, 2019 (access a great timeline here), the current state of country-specific economies, stock markets, and business performance need to be taken into consideration and would likely support a lower fair market valuation than would have been concluded in let’s say October 31, 2019. While far from a comprehensive list of considerations, the valuator would have to consider external factors such as those listed above, as well as internal (or business specific) factors such as original and revised forecasts, client losses, working capital, leadership retention, and many more. Based on these external and internal factors, the valuator will likely conclude a fair market value that is rather depressed than the value concluded prior to the COVID-19 pandemic.

For business owners, this would allow the transition of equity interest in the business to family members, trusts, etc. while minimizing potential tax implications. Alternatively, if holding companies maintains these business interests the strategy will still hold true since a valuation of all business interests within the portfolio would likely come to the same conclusion of a depressed value based on the information that is known and knowable as of the valuation date (or today).

Please contact us if you have any questions on estate and gift tax planning. We are happy to speak with you and your attorney about your available options.

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