The economic recession produced by the global COVID-19 pandemic has created hardship for many businesses and generally speaking has had a negative impact. However, this unfortunate situation has also presented unique estate planning opportunities.
The impact of the COVID-19 pandemic on businesses ranges considerably. While some are suffering, others are flourishing, and then there is everything in between. Overall, companies are generally less profitable than they were a year ago, and therefore they are less valuable. Although the decreased earnings should only be temporary, this still has a negative impact on the valuation of a business, and presents an opportunity to take advantage of estate planning techniques.
One of the most common estate planning techniques involves transferring appreciable assets, such as company stock, to your heirs before the asset appreciates. The value of the underlying asset at the time of the gift is the amount that is used to determine the reduction to the donor's lifetime estate tax exclusion.
Currently, the estate tax exclusion for 2020 is $11.58 million (individual) or $23.16 million (married couple). This means that an individual can make cumulative lifetime gifts of up to $11.58 million without incurring gift tax. Unused amounts are available to eliminate estate tax upon the individual’s death. Gifts or estates in excess of the exemption amount are taxed at a flat 40 percent rate. By transferring assets today (at depressed values), you are using your lifetime estate tax exclusion more efficiently and potentially paying less taxes out of your estate.
In addition, the upcoming Presidential election may have a significant impact on estate planning. The Tax Cuts and Job Act of 2017 (TCJA) doubled the estate tax exclusion to the current $11.58 million, and it is expected to revert back to the pre-TCJA amount of $5 million (adjusted for inflation) in 2026. However, Presidential candidate Joe Biden’s tax proposal accelerates the reversion of the estate tax exclusion to the pre-TCJA amounts, and greatly reduces the ability to transfer wealth tax free.
Both the COVID environment and potential tax law changes present unique opportunities to transfer wealth using lower valuations against a higher exclusion amount, thereby creating an ideal situation to execute estate planning matters which could see significant tax savings over the long term. If you would like to learn more about estate planning opportunities and ways to maximize tax efficiency, please contact your Kreischer Miller relationship professional or any member of our team.
Brian J. Sharkey is a director with Kreischer Miller and a specialist for the Center for Private Company Excellence. Contact him at Email.
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