The Perfect Storm. You’ve probably seen the movie and this year, we all probably sense that we are making history from within a Perfect Storm of a pandemic, political and social unrest, and economic turmoil.

I’ve read several articles recently that have borrowed that title to describe a different scenario – factors that have come together here at year-end that provide perhaps a once-in-a-lifetime opportunity to implement gifting strategies to reduce the tax burden on your children and descendants. These factors —depreciated asset values caused by the COVID-19 pandemic’s effect on the economy, record-low interest rates, and record-high estate tax exemption amounts—are the basis of this opportunity. Unfortunately, the clock is ticking because asset values are already starting to rebound and the outcome of the November 2020 election may make this “perfect storm” go away.

Now depending upon when you are reading this, the election is either already in process with mail-in ballots or the election is over. Also, depending upon when you watch this, we’ll see if the election results have been finalized. You may be fretting about how the election will affect your asset portfolio and there has been quite a bit written on that subject as well. What I’m going to focus on today, however, are the estate planning opportunities.

First – Depressed Asset Values.  Many assets, from the stock market, to real estate, to closely held businesses have lost value but are expected to rebound to pre-crisis values (or higher) and these are prime candidates for an effective gift-giving strategy. For tax purposes, gifts are valued on the date of the gift, and while that reduces the gift, estate, and/or generation-skipping transfer exemption by that amount, all appreciation after the date of the gift will escape gift and estate taxes which makes it a great opportunity for assets to grow in a tax-free environment.

Second Opportunity is a result of Record Low Interest Rates. This includes the IRS-sanctioned interest rates (such as the Applicable Federal Rate or AFR) which are critical to some of these estate planning strategies. When an asset’s appreciation exceeds these IRS “hurdle rates,” the excess appreciation becomes effectively a tax-free gift to children or other beneficiaries.

The third opportunity is really about avoidance… as there is a SCHEDULED REDUCTION OF THE GIFT, ESTATE, AND GST TAX EXEMPTIONS

Currently, the exemption amount for these taxes is $11,580,000 per taxpayer, or, effectively, $23,160,000 for a married couple. This means that an individual can make cumulative lifetime gifts of up to those amounts without incurring gift or GST tax. Gifts or estates in excess of the exemption amount are taxed at a flat 40% rate.

Now you may have heard that these current exemption amounts are due to expire at the beginning of 2026, will be reduced in half to $5,000,000 (or effectively $10,000,000 for a married couple), adjusted for inflation back to 2010. In addition to the federal tax, your estate may also be responsible for state-level estate tax.

Gifts made using today’s record-high exemption amounts are protected from future tax increases but, they’ll be lost if not used before the law expires at the beginning of  2026, or as we’re about to learn, quite possibly sooner.


What could possibly happen?

First, Increased Taxes. It doesn’t matter what side of the aisle your own, taxes will eventually need to be increased to raise revenue for the massive federal stimulus spending in response to the COVID-19 crisis. The gift, estate, and GST taxes might be seen as “low hanging fruit” to raise more revenue because it will impact only the wealthiest Americans who are not perceived to be struggling the most due to the pandemic.

Second, Accelerated Reduction in Exemption Amounts. If the Democratic Party wins the presidency and control of Congress in the election, there is speculation that the exemption amount might be reduced before 2026, from $11.58M to as low as $3.5 million. It’s also possible for the tax rate to be increased from the current 40% to 55% or even higher. Plus if you are familiar with the step up in basis for stock values when stock is left to your heirs, Joe Biden’s platform proposes taxing all unrealized appreciation on a decedent’s capital assets by eliminating that automatic step-up in basis at death. And, lets face it – regardless of who is in office, someone is going to have to come up with money to pay for the pandemic, the aid to businesses, and lost tax revenue so this is not a political party statement.

Third, Repeal of Some of the Most Popular Estate Planning Techniques. There have been several proposals in the past to repeal or cut back several really effective techniques, when the federal government begins looking for ways to raise additional tax revenue. I’m not going to get into the details right now, but popular targets might be Grantor Retained Annuity Trusts or GRATs, eliminating the Generation Skipping Transfer tax exemption for certain L-T trusts, and limiting valuation discounts we generally see for closely held business interests for lack of control and minority interest sales. These techniques have been used effectively for years to transfer wealth and minimize estate tax exposure and are subject to change.

Now before you get too worried, there are many effective estate planning techniques that are currently still available and we at The Rawls Group, along with your estate planning attorney and CPA, who very well may have sent you this video, want to help you plan for the successful transition of your business from the current generation of owners and managers through successive generations.

So, if you have any interest in ownership transfers, either now or in the future, I strongly suggest that you call your advisors now so that we can evaluate your succession planning strategy and help you plan for the future. In the midst of what most would consider more of an Imperfect Storm, don’t let an opportunity slip beneath the waters to bring good solid planning for your family’s future!

Watch the Video on the Topic

Contact us and we can help you with insights, other resources, and see if it makes sense to work together. At the very least, in 30 minutes, you may get some ideas you can apply to your business right away.

Personal Financial Planning

Estate planning is a complex endeavor, especially for owners of capital-intensive complex business’. Throw active and inactive family into the mix and trying to figure out what is fair, how to provide opportunities for the next generation without enabling them, and maintain family harmony.

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In complex family and business environments, it is imperative to lean on expert legal and tax advice who specialize in the same size business and estate as you.  We are not attorneys or CPAs but know experienced advisers if you are looking for sophisticated advisory services.

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