The Perfect Storm / Unexpected Windfall for Estate and Gift Tax Planning

COVID-19 and the 2020 Election

COVID-19 represents a new challenge for our country and the world. The S&P 500 index is down 30% since February, businesses and schools are being forced to close, and the healthcare system is preparing for the worst.

Despite the sobering forecast, the current economic storm represents a unique opportunity for estate and gift tax planning – an environment with low current values and fleeting tax policy.

Not only will the downfall in the stock market create a buying opportunity for stocks, it will also create a great opportunity for estate and gift tax planning. As Warren Buffet has said, be “Fearful when others are greedy and greedy when others are fearful.”

Lower values create a unique planning opportunity by allowing business owners the ability to transfer a greater portion of their business assets and reducing their taxable estate.

The COVID-19 virus is a rogue wave running into the fall presidential and congressional elections. This collision of two powerful forces could change the narrative in Washington, DC and result in changes to estate and gift tax rules to fund COVID-19 deficits.

DECREASES IN BUSINESS VALUES

Business valuations are impacted by the public markets and overall economy in several ways. Here are 4 reasons why the value of private assets may have declined:

  1. Actual or projected revenue and earnings may have decreased due to forced virus closures or decreases in demand.
  2. Interest bearing debt may have increased to pay employees and other fixed expenses.
  3. For an asset holding company, decreases in the holdings’ values may have reduced the value of the holding company. This is particularly evident when the holdings include publicly traded equity. This can also affect real estate assets due to virus related changes in occupancy rates.
  4. For non-controlling interests in privately held companies, discounts for lack of control and lack of marketability may have increased due to liquidity issues in the market.

RISK OF INCREASES IN ESTATE AND GIFT TAXES

Estate and gift tax exemptions have been extremely favorable under the Tax Cuts and Jobs Act of 2017 (“TCJA”), but things may change. Currently:

  • The exemption amount is $11.58 million in 2020 or $23.16 million for a couple.
  • The exemption returns to approximately $6.0 million in January 2026.

If either of the Democratic presidential hopefuls (two remaining as of the date this article was written) wins the election and control of the Senate flips, then there could be substantial changes made to the rules. Accelerating the restoration of the pre-TCJA exemption levels to reduce the deficits would only affect larger estates.

Joe Biden’s 10 step plan for increasing tax revenue does not address the TCJA exemptions; however, the plan seeks to:

  • Eliminate stepped-up basis on decedents’ transfers of appreciated assets.[1]

Bernie Sanders’ tax agenda has many provisions aimed at increasing estate and gift taxes paid and is outlined in the “For the 99.8% Act.” [2] Sanders’ plan would:

  • Reduce exemptions to $3.5 million.
  • Establish a progressive estate tax rate structure from 45% to 77%.
  • Reduce the effectiveness of certain trusts used by planners for tax minimization.
  • Eliminate private company valuation discounts (i.e. discounts for lack of control and lack of marketability).

THIS IS THE TIME FOR ACTION

We are in a perfect storm for thoughtful estate planning. An ideal environment is one with low current values on appreciable assets and favorable tax policy. The COVID-19 pandemic has created the environment for lower public and private values, and the upcoming election sets the stage for tax policy changes.

While we may not be focused on saving estate and gift taxes in the middle of a national crisis, one phone call to your estate planning attorney and the qualified business valuation professionals at Vallit Advisors – who are working through the storm – can start the process. Remember, after every storm, there are bright skies. The actions you take now have the potential to save your family millions in the future.

Prepared by:
Chris Rosenthal CPA/ABV/CFF, ASA, AEP
Managing Member
Vallit Advisors

and

Brian Broxterman CFA, ASA
Director
Vallit Advisors

 

[1] https://budgetmodel.wharton.upenn.edu/issues/2020/1/23/the-biden-tax-plan

[2] https://www.sanders.senate.gov/download/estate-tax-one-pager?id=DE8AEADA-A3F5-4D26-8517-F6730F161E29&download=1&inline=file

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