Lower Appraised Values Beneficial When Gifting & Settling Estates Amid COVID-19

Article

Date MArch 23, 2021

Over a year into the COVID-19 pandemic, the economy seems headed toward more stable ground. States are relaxing capacity and safety protocols for public and private businesses, and vaccine rates are trending up across the country.

Despite movements in the right direction, 2020 was a tough year for businesses in a range of industries from manufacturing and distribution to retail. With relatively few exceptions, most industries have experienced substantial declines in sales and earnings, either in the short term or on a permanent basis because of COVID-19-related economic disruptions.

In many cases, business and other asset values have been suppressed for business owners across the country because of these challenges. 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 as part of their estate and gift tax planning.

In addition to strong shifts in business and asset values, there are other factors to consider when managing your gift and estate planning in 2021. With the same political party in control of the White House and both houses of Congress, changes to gift and estate tax exemptions could be made.

The Tax Cuts and Jobs Act enacted under the prior administration in 2017 increased the federal estate, gift and generation-skipping transfer tax to $10 million and provided for an annual adjustment for inflation thereafter. The individual exemption amount for 2021 was adjusted to $11.7 million, up from $11.58 million in 2020, meaning an individual may gift or leave $11.7 million to heirs during their lifetime and pay no federal estate or gift tax, while a married couple could shield up to $23.4 million in assets.

There was no change to the annual gift exclusion amount for 2021, which remains at $15,000. This is the amount an individual can gift to another individual without tax and without using any of the unified lifetime exemption. While the current administration is focused on several pressing initiatives, there is speculation the Biden administration may move to adjust these policies later in the year to generate revenue in the wake of unprecedented economic challenges and record federal stimulus spending during 2020 and 2021. Even if no exemption level reduction is made over the next few years, the exemption is scheduled to decrease to $6 million for an individual and $12 million for a married couple in 2026.

The process of gifting assets that have, perhaps temporarily, 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 value. Relative to prior historical periods, the United States tax code currently permits a large lifetime estate and gift tax exemption, which under current tax provisions is scheduled to expire at the end of 2025. However, the new administration could change these limits. Business and other asset values might be low because of stressed economic conditions resulting from the pandemic and other market conditions, and business owners who do not act soon may lose the benefit of gifting under historically high exemptions and 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 this case, the asset is valued at the disposition date. Depending on each situation, the use of the alternate valuation date may produce a lower value of the transferred assets, and a more favorable tax result.

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 by realizing larger valuation discounts for lack of control and lack of marketability that are applicable to minority or fractional interests. These tend to increase during periods of market uncertainty such as the ongoing pandemic.

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