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Estate Planning During the COVID-19 Pandemic

July 28, 2020

If you own a public stock portfolio or a private business that’s taken a hit due to the pandemic, consider gifting interests in those assets to family now. Here’s why.

The COVID-19 pandemic has had adverse effects on many businesses, large and small. If you own a public stock portfolio or a private business that’s taken a hit recently, consider gifting interests in those assets to family members now, while values are low and tax laws are in your favor. These conditions may not last.

Low Values

For gift and estate tax purposes, the amount you must report for a gift is based on its fair market value (FMV) on the date of transfer. FMV is “the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts.” Decreases in value can help you transfer significant wealth out of your estate without triggering the 40% gift and estate tax.

In 2020, U.S. stock markets have experienced significant pricing volatility. So, timing may be critical when gifting interests in public stock portfolios. Try to make gifts when the value of your portfolio is low, not on a day when the underlying stock prices are rallying.

Private businesses generally aren’t traded on an active market, so there may be limited transaction data that can be used to determine FMV for gift and estate tax purposes. Valuations prepared by taxpayers — or their legal advisors — may trigger an IRS audit. As a result, most people hire independent business valuation professionals to determine the FMV of gifts of private business interests.

A valuator will evaluate market conditions, including how COVID-19 and other external threats and risk factors are expected to affect your company’s value going forward. Some businesses are expected to come out ahead after the dust settles, but many others will suffer long-term effects from the pandemic that will lower their values.

Favorable Tax Laws

Another reason to consider gifting strategies is today’s favorable federal gift and estate tax laws. For 2020, the annual gift tax exemption is $15,000 (effectively $30,000 for a married couple) per recipient. So, a married couple could gift $30,000 of cash or other assets to ten different family members (a total of $300,000 of gifts) without incurring any federal gift tax in 2020 — or tapping into their federal gift and estate tax exemption.

In addition, the Tax Cuts and Jobs Act (TCJA) nearly doubles the current federal gift and estate tax exemption. For 2020, the inflation-adjusted exemption is $11.58 million (effectively $23.16 million for a married couple). But these generous exemptions are set to sunset on December 31, 2025 — and Congress may reduce them even sooner, depending on the results of the November election, and future needs to generate revenue to fund COVID-19-related relief measures and other expenditures.

The IRS has also issued guidance addressing concerns that lifetime gifts above the pre-TCJA limit ($5,000,000 adjusted for inflation) would be includable in the taxable estate of the donor and, therefore, be subject to federal estate tax. The guidance confirms that any gifts that have been sheltered due to the use of increased federal gift and estate tax exemptions under the TCJA won’t be clawed back if the donor dies after the exemption reverts to pre-TCJA levels in 2026.

Beware: The gift and estate tax laws in some states, including Massachusetts, Connecticut and Rhode Island, differ from the federal rules. Proactive gifting strategies aimed at reducing federal gift and estate taxes may trigger undesirable state tax obligations.

Use It or Lose It

Contact our wealth management advisors to help evaluate your existing estate plan and modify it to take advantage of potential tax-saving opportunities in today’s marketplace. We can help your family preserve its wealth and achieve your financial objectives.

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