Never before has a serious health-related event produced such a negative impact on worldwide economies. Both private and publicly held companies have seen huge decreases in value. The silver lining is that these conditions create tax planning opportunities that could be advantageous to your estate.
An overall goal of estate planning is to transfer assets to younger generations in a tax efficient manner with the expectation that those assets will appreciate in value over time and avoid taxation in the estate of the donors. The loss in values attributable to COVID-19, combined with future reductions in the amount exempt from gift, estate and generation skipping transfer taxes, results in circumstances that should not be overlooked.
The Tax Cuts & Jobs Act (TCJA), enacted in December 2017, virtually doubled the amount exempt from gift, estate and generation skipping transfer taxes by increasing it to $11,180,000 per person in 2018. The amount exempt is indexed for inflation and in 2020 the amount exempt is $11,580,000 per person. The TCJA provides that the higher exemption amounts will expire on December 31, 2025. However, the exempt amount could be lowered prior to December 31, 2025, depending upon the outcome of elections in November 2020. If the Democratic nominee is elected President, and the Democratic Party retains control of the House and gains control of the Senate, it is possible that the exemption amount could change as early as 2021.
Some of the changes that have been discussed are to reduce the exemption amount to pre-2018 levels, or even as low as $3 million, combined with allowing only $1 million of the exemption to be used during lifetime. If enacted, these changes would have a major impact on estate planning.
Taxpayers may be wise to take advantage of the post-COVID-19 values of businesses and publicly traded securities by choosing one or more methods of estate reduction, including direct gifts, installment sales, transfers to grantor trusts and loans to family members at today’s very low safe harbor interest rates.
In sum, planning opportunities may exist in today’s COVID-19 economy that could result in significant tax savings to taxpayers and their descendants. For assistance in identifying these opportunities, please contact a member of Baldwin Haspel Burke & Mayer’s Estate Planning team.