Lower Appraised Values Can Be a Benefit When Gifting and Settling Estates amid COVID-19


Date May 5, 2020


At the inception of the COVID-19 pandemic in the first quarter of 2020, stock markets responded with sharp declines.  The S&P 500 index declined over 35 percent between February and March 2020 and as of May 4, 2020 remained approximately 16 percent below a record high reached on February 19, 2020.  Similarly, with relatively few exceptions, a large majority of industries expect to experience substantial declines in sales and earnings in the short-term and possibly on a more permanent basis resulting from disruptions in economic activity associated with COVID-19.  These challenging times will result in lower business value for many businesses as well as the value of other assets. However, a decline in business value might provide a silver lining for some business owners and high net worth individuals who can take advantage of reduced values when transferring assets.  These businesses and individuals will likely achieve more advantageous results for estate and gift tax planning purposes and, in some cases, estate settlement.

Under the United States’ Tax Cuts and Jobs Act enacted in 2017, the federal estate, gift, and generation-skipping transfer tax increased to $10.0 million and provided for an annual adjustment for inflation thereafter.  As a result, the 2020 exemption amount as adjusted for inflation approximates $11.58 million, while the annual federal gift tax exemption per recipient remains at $15,000.  The process of gifting assets that have declined in value provides an efficient mechanism for leveraging the lifetime federal gift tax exemption and annual exclusion amounts, especially for assets that are expected to rebound in the short-term.  Relative to prior historical periods, the United States tax code permits a large lifetime estate and gift tax exemption, which under current tax provisions is scheduled to expire in 2026. Note, however, a new federal government administration could change the current limits.   Currently business values and other values might be low due to stressed economic conditions resulting from the COVID-19 pandemic and other market conditions.  Business owners who do not act soon may lose the benefit of gifting under historically high exemptions and historically low values.

For estate tax settlement purposes, the value of an estate can generally be evaluated on one of two dates:  (i) the date of death or (ii) the alternate valuation date, which is six months after the date of death.  The notable exception to this general rule is if an asset is sold, distributed, or disposed within six months of the date of death.  In that case, the asset is valued at the disposition date.  Thus, for estates of persons where the date of death took place starting in the latter half of August 2019 and assets were not disposed, the use of the alternate valuation date may produce a lower value of the transferred assets and thus a more favorable tax result, dependent on each situation.

In addition to higher federal tax exemptions and a current period of lower asset values, business owners (and partnership interest owners) can take advantage of market volatility to realize larger valuation discounts for lack of control and marketability that are applicable to minority or fractional interests, which tend to increase during periods of market uncertainty.

Gordon Brothers’ professionals bring decades of tax-related valuation experience to each engagement.  Additionally, Gordon Brothers values all classes of assets: business interests, intangible assets, inventories, and machinery and equipment.