COVID-19 Opportunities for Estate and Gift Tax Planning: Preserving Your Wealth

Apr 16, 2020

We are all experiencing the economic and social impacts of the COVID-19 pandemic and looking into the future feels uncertain and unsettling. By now, many businesses have either closed or substantially curtailed operations due to executive orders by governors throughout the U.S., such as Governor Whitmer’s “Stay Home Stay Safe” order here in Michigan. Unfortunately, nobody can predict how long this pandemic is going to last. However, despite all this uncertainty and challenge, there are always opportunities to be found. In this case, an opportunity for estate and gift tax planning.

For business owners that have been considering gifting to heirs as a path to ownership transition, now may be the time to take action. Based on the public financial markets, current valuations are down across a great number of companies and industries from where they were at the beginning of this year. This provides an indication of the impacts on privately-held companies as well. Another reason to take action now relates to tax law. With the upcoming presidential and congressional elections, we view changes to current tax law as a potential risk.

Under U.S. federal tax law, the current lifetime gifting exemption is the highest it has ever been at ~$11.6 million per individual, and ~$23.2 million for a married couple. A change in political power in Washington D.C. after the election later this year could result in this exemption being curtailed, or even eliminated.

Purely from a tax efficiency perspective, there are a couple of favorable dynamics during times of negative economic conditions. Transitioning ownership through internal transfer channels, such as gifting, when business valuation multiples are lower, benefits you by lowering your tax bill. Second, for businesses valued greater than the exemption limitation, a greater portion of your gift will fall under the exemption, allowing you to transfer a greater percentage of ownership interest in the company under the tax-free amount.

This means you have more control over the preservation of your wealth for future generations. Simultaneously, you can ensure your succession is planned so as not to put your family, employees and legacy in jeopardy.

We think now is likely a unique window of opportunity where business values are low and tax policy is favorable, and you should discuss or revisit your estate plans with your attorney, CPA, and/or wealth advisors. If your plan involves gifting an interest in a closely-held entity, it is required that your reporting of the gift for gift tax purposes be supported by a credible independent valuation that will withstand IRS scrutiny. If you have any questions regarding your gift and estate planning, we would welcome an opportunity to be a resource to you and your advisors.

Best of luck to you, your families, and your businesses. We will be discussing this topic at our webinar on April 21, 2020