During these unprecedented times, there are many things that run through our minds. For an estate planner, it’s thinking about how clients can take advantage of a downturn in the economy/market and preserve wealth in their families for future generations.
The Estate and Gift Tax Exemption is currently at $11.58 million per individual ($23.16 million for married couples). An individual can, therefore, gift during their lifetime, or transfer at death, a total of up to $11.58 million of assets without paying a Federal Estate Tax.
The current economic uncertainty and the country effectively closed for the unforeseeable future potentially gives rise to higher risk and lower values of privately held businesses. If an individual has a net worth (Estate value) well in excess of the above-mentioned thresholds, gifting assets during their lifetime that are expected to appreciate in the future may be something to consider while the stock market and valuations are low. Keep in mind though, generally speaking, the donee’s basis and holding period remains the same as the donor’s basis at the time of the gift. We’ll talk more about how basis can affect your decision to gift later.
Gifting now can potentially lock in a low value for the gift, therefore, preserving more of that $11.58 million per individual allowed during their lifetime (and transferred at death). This may not only be beneficial for assets traded on the stock market, but also for assets that do not have a readily ascertainable value (i.e. real property, closely-held interests in the family business, etc.). Obtaining a business valuation which may include increased discounts due to the current uncertainty, such as lack of marketability and lack of control will further reduce the value of the gift.
There are some gifting techniques that work well in the current low-interest rate environment since the nature of the gift calculation removes assets at a reduced value. The usage of IDGT (Intentionally Defective Grantor Trusts), GRATs, and Charitable Trusts are examples of ways to accomplish such gifts but each vehicle has its own benefits and limitations.
Before anyone gets too excited about this idea, as we all know, one size never fits all in the world of taxes (or jeans for that matter). For those individuals that wouldn’t otherwise have a taxable estate (those passing away in 2020 with a net worth value less than the $11.58 million) keeping those assets in their estate may be the best estate plan of all. Under current law, upon death, the decedent’s assets get a step up in basis to fair market value (with the exception of certain assets, for example IRAs or 401(k)s). When a beneficiary inherits assets from a decedent and subsequently sells the asset, capital gain/loss is computed by taking the difference between the selling price and inherited cost basis on their income tax returns. With capital gains rates at 15%/20% for Federal and state tax rates (NJ max rate of 10.75%), it may be advantageous to get that step up in basis at death to avoid an increased income tax upon disposition.
As mentioned above, it’s not a one size fits all answer. Decisions should not be made solely on the potential amount of taxes that an Estate may pay or income tax of an heir. The ultimate desire of the client is most important, and the estate plan should be structured based on what will benefit the taxpayer and their families the most in the future.
Please feel free to consult your WG tax advisor to discuss.