Can’t Miss Opportunity in the Storm: Estate Planning in a Downturn

We can all admit that today’s COVID-19 environment is nothing sort of strange. We are all operating in an unprecedented environment of both uncertainty and boredom. With all the uncertainty it can be hard to think long term and strategically – but let’s do that (and maybe address some of the boredom too). Let’s talk about estate planning.

This is truly an unprecedented time to be looking at potential estate and gift strategies. By and large, estate and gift strategies involve transferring assets with low values out of your estate and thereby limiting gift tax exposure to the estate. It would be hard to argue that asset values are depressed today. Taking it a step further, most industry experts anticipate a reduction in the gift tax exemption (more on that below) over the next few years. These two elements combine to make this an ideal time to address potential tax exposure.

First let’s talk about what estate tax strategies entail, and then we’ll look at both elements of this perfect storm in more detail.

Estate Tax Strategies

There are a number of tools that estate planners use, ranging from GRAT’s to IDGT’s to FLP’s. While it may all sound like quite a bit of alphabet soup, the common theme is moving assets out of your estate early. Why? Because assets that are not in your estate are no longer subject to estate tax. And in a world where the value of assets increases, moving those assets early keeps the basis at the time of transfer low. Depending on the size of the estate and the current tax environment, you may be able to essentially transfer your entire estate without exposure to Federal estate tax. Currently that threshold amount is $11.58 million for an individual, or $23.16 for a married couple.

Beyond transferring assets early, another strategy often involves discounting interests in companies. This may including operating companies as well as companies that might hold securities or other assets. A business appraiser will typically analyze the interest in the entity being transferred and apply discounts for control and / or marketability. These discounts can depress the value of assets significantly- again yielding a tax efficiency by transferring assets out of the estate at the lowest value possible.

Depressed Asset / Business Values

If the goal is to transfer assets early and at a low value, does this strike you as a time to act? How is your 401k looking right now? Good chance that and the rest of your portfolio has shown a lot of red in the last 90 days.

Liquid assets and securities are obviously one asset class that has clearly taken a hit. But there’s little doubt that at least as of today most operating companies are worth less than they were 90 days ago. Yes, they may (and we hope likely will) recover value in the future, but as of today there are systemic forces that are absolutely compressing current value.

Consider this:

  • Most (but not all) companies are going to see a hit to revenue this quarter and likely this year
  • Most companies will be burning through working capital and cash reserves in order to weather the storm
  • Companies may access credit lines or debt facilities in order to make ends meet
  • The cost of that debt may have increased. Outside of Federal disaster relief facilities, we anticipate the cost of debt will materially increase in the short term
  • Companies may be making decisions that prioritize short term survival over long term growth prospects
  • Companies that hold investment assets (think securities, stocks and bonds, funds, etc) have in all likelihood seen asset values plummet (note: your portfolio may not be structured in a holding company right now- but it certainly can be in an estate planning scenario. End result is the same)

All of these elements are combining to make this an incredibly auspicious time to consider an estate planning strategy that take advantage of opportunities in the storm.

The Perfect Storm: Decreasing Gift Tax Thresholds

As we mentioned above, the current estate tax threshold is $11.58 million for an individual, and $22.16 million for a couple. This means that for an individual the first $11.58 million of the estate is not taxable (and double that for a couple). That’s a pretty sizeable number- the vast majority of Americans have no concern whatsoever about gift tax exposure at that level.

But… it’s not going to stay there.

The current exemption levels are an artifact of the 2017 Tax Cuts and Jobs Act. The $11.58M / $22.16M exemption is set to automatically sunset in 2026. Meaning absent affirmative action by Congress and the President the exemption is going to return to about $6M. Now THAT is a number that is much more realistic for many many Americans – especially those that own companies.

The consensus view among T&E experts is that the current exemption is the high water mark and is likely to materially decrease. (In fact- we ran an event back in January with several prominent Private Bankers / estate planners, and this reduction was a top line of discussion. Check it out). There just is not political support to maintain a high threshold which is widely perceived as a “tax break for the rich.” The exemption was under attach before COVID-19, with various Presidential Candidates proposing massive cuts to the exemption, adding a tax burden to “stepped up assets” after death, and increasing tax rates as high as 77% (that’s not a typo).

Bottom line: the exemption is going down, meaning your estate tax burden is going to increase if you fail to act.

Act Now

Look, I realize that you’ve got a lot going on right now (in between bouts of boredom and evening Law and Order re-runs). I do to. And I’m definitely not saying this should be your highest priority. First focus on surviving, then plan for thriving. And this is just one of those great opportunities where you can accomplish some big moves while there isn’t necessarily the same kind of day to day pressure you usually face.

So, by all means, focus on survival tactics, but when you come up for air, let’s start talking about how to take advantage of the opportunity in the storm.

Dan is the Founder of Quantive and Value Scout. He has two decades of experience in leading M&A transactions. Additionally oversees Quantive's valuation practice and has performed thousands of business valuations.



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