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Estate Planning Strategies During a Low-Valuation Environment

May 6, 2020

The COVID-19 pandemic has created both a global economic slowdown and future uncertainty. With markets being more volatile than ever, investors and business owners are experiencing record-setting fluctuations in  marketable security values. Though both U.S. and global markets are bracing for continued volatility related to the pandemic, there are steps investors can take in this low-value environment to enhance estate planning.

Regardless of the ongoing pandemic, federal gift tax exemptions are at an all-time high and will continue to be so until at least 2026, or longer if extended by Congress. With the 2017 Tax Cuts and Jobs Act (“TCJA”), the federal estate, gift, and generation-skipping transfer tax exemption (“exemption”) was raised to $10 million per person with an annual inflation adjustment. This brings the inflation-adjusted amount to $11.58 million as of January 2020, with a top rate of 40%. For executors of estates and those either contemplating or executing estate planning, now may be the time to get a valuation of an estate and take advantage of the lower valuations.

Marketable Securities

Obviously, the markets are currently low and extremely volatile. This pandemic-related dip creates an environment in which to gift marketable securities, as these low-value assets can gifted tax-free, as long as the gift giver stays within their remaining exemption—up to the $11.58 million cap. Donors can use less of their exemption amounts, retaining more allowances for future gifts. As the markets are expected to eventually recover, this can create wealth for the receiver that is outside of the donor’s taxable estate. In gifting heavily impacted assets, gift givers can maximize ROI. Additionally, if the individual receiving the gift is in a lower tax bracket than the individual giving the gift, the income generated post-gift date will be taxed at the lower rate, further contributing to overall tax savings.

Review all retirement savings plans that you may have, with the thought of possibly converting IRA investment accounts to Roth IRAs. Tax would be paid on the value of the assets at the time of the conversion. Once transferred to the Roth IRA, however, these assets will continue to grow tax-free as well as be withdrawn tax-free because of the upfront payment during the conversion.

Business Interests

Marketable securities are not the only areas of wealth being heavily impacted. Certain business interests and holdings, including real estate, may not have declined as rapidly as the marketable securities. However, many businesses have felt the impact. Though many are reluctant to part with these business assets through an outright gift, these assets are good candidates for gifting under the current gift tax exemption.

Now may be a good time to form a closely held business entity, such as a limited liability company or a limited partnership. Use the lower asset values to create businesses with family entity interests, as opposed to an outright gift, in order to remove future appreciation from taxable estates. Values can be discounted for lack of control and marketability for closely held family entities, thus lowering the overall value and allowing the gift of the business to fall under the available exemption.

Alternate Valuation Date

The Internal Revenue Code provides for two valuation dates (1) the "date of death;" or (2) the "alternate valuation date." Executors of estates involving individuals who passed away within the last six months should consider valuing the estate using the alternate valuation date. The alternate valuation allows the fair market value of the gross estate (for assets not distributed, sold, exchanged or disposed of within six months after the decedent’s death) to be determined as of the date six months after the decedent’s date of death. The current low asset valuations can help transfer a larger percentage interest in a closely held corporation or family limited liability corporation while eliminating or lowering estate tax.

Charitable Gifts

With the public health crisis and rapidly increasing unemployment, consider charitable gifting when planning your estate. By making charitable gifts of assets or cash now, you can reduce your taxable estate while also potentially receiving the benefit of a charitable income tax deduction. Prior to the pandemic, the TCJA increased the standard income tax deduction and decreased the availability of other itemized deductions, resulting in a lower number of taxpayers itemizing deductions, including charitable deductions. This has caused people to “bundle” charitable gifts they would normally make over the course of many years into one year in order to reach the higher threshold. This bundling of charitable gifts is a tax-efficient way to help support your community during this challenging period.

The 2020 Coronavirus Aid, Relief, and Economic Security (“CARES”) Act encourages additional charitable giving.  The Act allows a $300 above-the-line deduction for cash charitable gifts by non-itemizing taxpayers.  Furthermore, it increases the charitable deduction adjusted gross income percentage cap from 50% to 100% for itemizing taxpayers.

Though this is a frightening and uncertain time, estate planning has become more important than ever. Having an open and honest dialog with your beneficiaries will help set them up for success.

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Shaili Gosalia

Shaili Gosalia is an Accountant in the Forensic, Litigation and Valuation Services Group, with over 5 years of experience.

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