Planning opportunities for these unprecedented times

By Mark Bernstein , Danielle Justo

The current economic, tax and political climate makes this a great time to implement gifting and other estate planning strategies.

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This year, as the COVID-19 pandemic has upended our lives, our attention is focused on the wellbeing of our families and loved ones. Because their futures are our top priority, there may be no better time than now to begin estate planning. 

The biggest question to consider is whether you are willing to give away assets and the income produced from those assets during these unprecedented times. From a financial perspective, asset values and interest rates may never be this low again, and certainly the tax benefits may never be greater. For 2020, the federal exemption from estate and gift tax is capped at $11.58 million for individuals or $23.16 million for a married couple. This exemption, which was enacted by the Tax Cuts and Jobs Act in 2017, will sunset Dec. 31, 2025, and revert back to $5 million (indexed for inflation).

Notably, the IRS confirmed that any gifts made will not be “clawed back” after the sunset date if they exceed the reduced exemption amount, provided they are not in excess of the upper limit. Individuals can also make gifts to their children using the annual exclusion, which could be essentially tax-free, if properly documented. That means that for 2020, you and your spouse could jointly gift $30,000 to each child.

However, if a new president is elected and control of the Senate changes in November, the estate and gift tax exemption could be at risk. New lawmakers may reduce or eliminate the exemption altogether to help pay for coronavirus-related government spending this year, or they may let it revert to the $5 million amount sooner than 2025.

You might be thinking that you have a few more years to gift the value of the business to your children. But if your business valuation is based on the income method, it is probably greatly reduced given the current economic situation. It is possible that your business is currently worth only 60% of its previous valuation. That reduction gives you an opportunity to gift your children much more ownership. As the economy recovers, the value of your business should “grow back” over the next few years. Making the gift to your children now, whether directly or in a trust, also saves any future estate tax on the appreciated value in excess of the federal exemption. 

Low interest rates create another opportunity for estate planning. Many estate planning techniques utilize a monthly interest rate set by the IRS, which is determined based on a number of economic factors. This rate is at historic lows, and gifts of assets are likely to appreciate at a greater rate over the long term as the effects of the pandemic subside. By transferring assets directly or putting them into a trust for your children now, it locks in at the current low rate. Then, if the value of the assets appreciates at a greater rate, more wealth can be transferred from your estate without gift tax.

Should you pursue gifting, it is important to work with your certified public accountant (CPA) and attorney to evaluate gifting options and related estate tax savings and to determine if they are worth what you are giving up today. In addition, your CPA can file a gift tax return to document the gift with the IRS, and your attorney can help document the transaction.

Estate planning and gifting to loved ones are important decisions. This may be a time of great  uncertainty, but it is an optimal time to plan for the future of your loved ones.

Mark Bernstein is the partner-in-charge of the New York office of Katz, Sapper & Miller, a consulting, tax, and accounting firm (mbernstein@ksmcpa.com). He helps high-net-worth individuals, family offices and real estate owners navigate tax and financial issues to achieve their goals. Danielle Justo is a shareholder at Rich May, P.C., a law firm in Boston. She is the co-chair of the firm’s commercial real estate practice group and practices in the tax & real estate planning group (djusto@richmaylaw.com).

 

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