Article
Estate planning opportunities to increase gifting percentages during disruption
June 3, 2020 · Authored by Michael C. Massey
During this period of economic disruption caused by the COVID-19 pandemic, it’s natural to want to protect your assets. However, pursuing gifting opportunities during this time — while business valuations are lower for many companies — could benefit your estate and heirs.
Though it’s difficult to predict an exact recovery timeline, increasing the ownership percentage of a private business you gift to your successors could pay off should the economy strengthen and valuations increase again. While financial markets hit lows in March, signs of improvement are beginning to emerge, so there could be limited time for business owners to make an appropriate gift in response to the current conditions.
Below is an overview of how declining company values could benefit your estate during the pandemic and factors to consider when determining your company’s value.
Why is now the time to gift?
While the fair market values of real estate, asset-holding companies, and operating companies have likely fallen during this disruptive time, business owners can gift a larger percentage of their companies at low values to increase the impact of estate planning.
Currently, the individual lifetime gift tax exemption — the highest amount your estate can gift during your lifetime without paying a gift tax — is $11.58 million. Should tax laws change in the future, there’s no guarantee the lifetime exemption will remain at this relatively high level.
Gifting while values are depressed can help reduce the impact on your lifetime exemption and allows you to move a greater percentage of assets out of your estate. This could also reduce your future estate taxes. In addition, your heirs could benefit from the appreciation in value of the assets that you gift once the economy normalizes.
Since the end of 2019 through May 8, 2020, the Dow Jones Industrial Average and the Russell 2000 indices are down 14.7% and 20.3%, respectively, primarily as a result of the pandemic.
While additional time has passed since publication of this article, the below chart demonstrates markets are improving over time. This shows the sense of urgency that should accompany your decision-making process.
How has the value of my business been impacted?
Determining the ownership percentage of your company you’d like to gift will depend on the company’s current value. Every business has been impacted by the pandemic differently, so it will be important to address the specifics of your company.
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The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.
