Fourth Quarter 2020: Gift and Estate Tax Planning Opportunities

By Ann Ramage, CPA, Tax Partner | Family, Executive & Entrepreneur Advisory Services and Asif Charania, CPA/ABV/CFF, ASA, Valuation and Forensic Services Senior Manager

Market Volatility and November Election Uncertainty May Provide Opportunities for Gift and Estate Tax Planning Strategies

2020 has already seen turbulence as a result of the COVID-19 pandemic and demonstrations for social reform. This turbulence has filtered into a roller coaster ride in the equity markets. Thus far in 2020, while the Dow Jones Industrial Average (DJIA) started the year on an upswing, the surge culminated in the February 12, 2020, historic high of $29,551.42. By March 23, 2020, the DJIA experienced a three year low of $18,591.93 before rebounding by the end of July 2020 to $26,428.32. However, this increase was primarily attributable to a handful of the largest companies in the world (i.e. Apple, Amazon, Google, etc.). With COVID-19 case numbers on the rise and with the Presidential election now less than three months away, volatility in the equity markets may continue for the rest of 2020.

Given the market volatility and the uncertainty surrounding the outcome of the November elections, the next few months may provide opportunities to execute gifting and estate tax planning strategies. To ensure that you are prepared to take advantage of potential opportunities, a review, refresher or even development of a whole new gifting or estate tax plan may be necessary now so that you may act quickly when opportunities present themselves. We have included below some thoughts and ideas to get you started and look forward to opportunities to discuss these ideas and how they may fit in with your plans and timeline.

Estate and Gift Tax Planning Considerations for Family offices, Executives, & Entrepreneurs

Annual Exclusion Gifts

To the extent not already made for 2020, either gift now or be ready to gift using assets identified when the assets experience a decrease in value.

• For 2020, each taxpayer may give to any person up to $15,000 without having to use the estate tax exclusion.
• For 2020, married taxpayers may combine their exclusions to give up to $30,000 per person.

Grantor Retained Annuity Trust (GRAT)

Consider employing a GRAT to freeze the value of specific assets in your estate and give away future appreciation in the assets, net of an inflation factor to beneficiaries.

• This technique works well for marketable securities in which you have a concentration either in a particular stock or an industry.

Sale of Assets to an Intentionally Defective Trust (IDIT)

Similar to a GRAT in estate planning goal, this technique uses a note payable and sale of asset to freeze the asset value at gift date to allow the beneficiaries to enjoy future appreciation.

• This technique works well for assets that are not readily marketable, such as a privately owned business’ stock or LLC interest.

Gift of Assets to Use Increased Estate Tax Exemption

Consider making gifts to utilize remaining exemption while property values are low and in anticipation of potential decrease to the exemption that may occur dependent on the November election results.

• Cumulative Estate Tax Exemption as of January 1, 2020, is $11,580,000
• Currently this exemption is set to revert back to the 2018 level of $5,000,000 as of January 1, 2026, but could be repealed earlier dependent upon elections and budgetary issues.

Gift of Property to a Charitable Lead Trust (CLT)

If you have combined charitable and estate tax planning, employment of a CLT may allow you to meet both objectives in one gift. This trust technique allows you to gift property to the CLT for the benefit of a charity for a prescribed period of time and upon expiration of the period, the remaining assets are transferred to your designated beneficiaries. As result of this split interest, a discount is effectively applied to the gift for estate tax purposes.

• This technique works well for assets that are readily marketable
• This technique works well for assets that are not readily marketable, such as a privately owned business’ stock or LLC interest; however, Unrelated Business Income Tax implications should be considered.

Business Owner Valuation Considerations

From a valuation perspective, many of the estate planning techniques noted above involve transactions of minority interests in closely-held businesses. In the current environment, business owners can use this uncertainty to their advantage due to the following market trends:

• Depressed values in many businesses due to liquidity issues, supply-chain constraints, and overall reduction in demand due to the pandemic.
  • As previously mentioned, although the stock market has shown signs of a rebound, most of the increase was attributable to hand full of the largest stocks in the world.
  • Although the CARES Act injected liquidity into private businesses, many have quickly extinguished these funds. Moreover, a second stimulus bill still hangs in the balance as Congress has been unable to come to terms on a deal in recent weeks.

• Selling a controlling interest in a closely-held business is difficult enough in the current environment because of constraints in available debt financing and uncertainty regarding future cash flows. Moreover, selling a minority interest in a closely-held business is even more onerous because a minority owner cannot control cash flows, impact the direction of the business, achieve near-term liquidity because of restrictive transfer positions, and has no insight into the expected holding period (i.e. time horizon to a potential exit). Consequently, these additional constraints impose additional discounts on minority interests (i.e. the discount for lack of control and discount for lack of marketability). While these discounts were recognized prior to the pandemic, they are potentially amplified in the current environment due to increased volatility and uncertainty.

While this volatility is painful to live through as we watch our brokerage and retirement accounts bounce around like a tennis ball, if you dare to take the plunge, opportunities exist to use this volatility to your potential advantage by implementing gift and estate tax planning strategies while asset values are low. Leveraging these lower values may allow you to transfer more assets to family and friends and use less of your estate tax exemption to do so.

Questions on applying these strategies to your unique situation? We welcome the opportunity to speak with you about your plans and how these strategies may assist you in achieving your goals. Please reach out to your Keiter Opportunity Advisor or Email | Call: 804.747.0000.

Additional Resources