The novel coronavirus pandemic has had a dramatic impact on the U.S. economy.
Investors have experienced record-setting fluctuations in marketable security values on U.S. exchanges, and global markets are bracing for continued pandemic-related volatility.
Impulsive decisions to try and play these market swings can derail long-term investment, business succession, and personal goals, but as part of a comprehensive estate plan, it can be fruitful to focus on the "bright spots" that present themselves in a downturn. Lower asset values during these tumultuous times are the proverbial lemons that – with careful planning – can be transformed into estate planning lemonade.
For those considering the lifetime transfer of wealth by gift, certain steps can be taken in a low-value environment to sweeten the otherwise sour taste left from seeing all that red.
Federal Gift Tax Exemption: Still As Sweet As Ever
Pandemic or not, the highest-ever federal gift tax exemption is
still in effect, at least until the sooner of 2026 or an
intervening change by Congress. The Tax Cuts and Jobs Act of
2017 increased the federal estate, gift, and generation-skipping
transfer tax exemption to $10 million per person with an annual
inflation adjustment. As of January 1, 2020, the
inflation-adjusted exemption amount is $11.58 million per person
with a top rate of 40%, and the federal gift tax annual exclusion
per donee is $15,000. The increased federal gift tax
exemption since 2018 has enabled larger lifetime gifts of assets,
income-producing or otherwise, and often at discounted
values.
Gifts of Marketable Securities
The recent pandemic-related decreases in asset values now sweeten
the already sweet opportunity of lifetime wealth transfers as part
of a comprehensive estate and business planning strategy.
Gifts of assets that have dipped in value (e.g., marketable
securities) efficiently leverage the large lifetime federal gift
tax exemption and annual exclusion amounts available under current
law. By transferring lower-value assets now, individuals can
use up less of their exemption amounts and thus retain more for
future gifts. And when the markets recover, and asset values
increase, that growth will occur outside the donor's taxable
estate. Today, as compared to just a few weeks ago, donors
may get significantly more bang for their exemption buck by gifting
hard-hit assets, especially ones expected to rebound
significantly. As an added bonus, if a recipient of an
outright gift is in a lower income tax bracket than that of the
donor, then any post-gift income generated by the gifted asset will
be taxed a lower rate, resulting in additional overall tax
savings.
Gifts of Closely-Held Business Interests
Certain business interests or real estate holdings may not have
declined in value as rapidly as marketable securities or donors may
be reluctant to part with these assets by outright gift.
Nevertheless, these assets may be good candidates for gifting under
the current favorable federal gift tax exemption. Family
limited liability companies or limited partnerships have long been
used in the estate and business planning context to transfer the
economic value of interests to a younger generation while still
centralizing management and voting control. Depressed market
values can highlight and compound the benefits of this transfer
structure.
If you have been considering the creation of a closely-held entity, now may be an especially advantageous time to implement that plan. Business and real estate owners can take advantage of lower asset values for federal gift tax purposes, again removing any future appreciation from their taxable estates. Doing so with family entity interests rather than outright gifts of assets can provide additional opportunities for tax savings. In the realm of closely-held family entities, owners can usually apply discounts to values of transferred interests for lack of control (minority interest discounts) and for lack of marketability (since there is no public market). Thus, lower asset values combined with family entity valuation discounts may maximize the transferred value while minimizing use of the available federal gift tax exemption.
Charitable Gifts
The pandemic and attendant economic downturn have drawn attention
to charitable planning as our community and government resources
are being strained. Tax-exempt charitable organizations are
more important than ever in their protection of the most vulnerable
members of our communities.
Before the pandemic took hold, the Tax Cuts and Jobs Act of 2017 increased the standard deduction and capped certain other deductions, resulting in a reduction in the number of taxpayers itemizing their deductions, including charitable deductions. In response, some taxpayers have started condensing more than one year's worth of planned charitable gifts into one tax year – perhaps skipping the next year altogether or just reducing the next year's gifts – in order to reach the higher threshold in the "bundled" year. If you have been looking for a way to help the charitable organizations in your community during the pandemic, this "bundling" of charitable gifts may be a tax-efficient way to support their important work.
The recently enacted Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") promotes additional charitable giving by:
- allowing a $300 above-the-line deduction for cash charitable gifts by non-itemizing taxpayers, and
- increasing the charitable deduction AGI percentage limitation from 50% to 100% for itemizing taxpayers.
Stay Home, Stay Safe, and Have the Talks
As many of us hunker down, work from home, and practice social
distancing to help flatten the curve of the COVID-19 pandemic, we
are presented with an opportunity to carve out a bit of time with
our loved ones to discuss these gifting techniques or to engage in
the broader estate or business planning conversations that we may
have been putting off. If you have any questions or would
like to discuss any aspect of your estate or business planning, our
firm's trusts and estates attorneys are up and running remotely
and available to assist you.
Originally published March 31, 2020
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.