The news coming from all directions relating to the COVID-19 pandemic is, and should be, the priority of every American, as well as citizens of the world. The worry and uncertainty created by this outbreak is definitely shaking the fabric of our economy, but we are hopeful that the situation will be short-lived, and our nation’s businesses will soon return to full operations.
From a valuation standpoint, the circumstances surrounding the U.S. and worldwide economies, which have caused asset values to significantly diminish, can yield significant tax advantages to those ready and able to take action. Business owners will look to their advisors to help them through this crisis, including evaluating their estate plans. Though we are confident that the country will ultimately grow stronger as a result of this adversity, we must all face the current challenges and manage those aspects of our future over which we have some control.
The current political climate is another primary factor that contributes to the importance of focusing on estate planning. Though recently overshadowed by the Coronavirus news, it cannot be ignored that the upcoming presidential election could also have a tremendous impact on the economy. How the current administration’s response to the ongoing Coronavirus pandemic is perceived by voters, as well as its ultimate impact on the economy, will almost certainly influence election results.
It appears that Joseph R. Biden will be the presumptive Democratic Presidential candidate, and a potential victory for Democrats could be within reach. If Mr. Biden should succeed in winning the Presidency in November, it will usher in a new era. The change of political power between parties could possibly work to unwind some critically key elements of the estate and gift tax laws that currently exist and are favorable to taxpayers. The effect could be particularly costly for privately-held business owners. As such, we understand the importance of evaluating estate plans now, before any potential unfavorable changes.
In the area of generational wealth transfer, Mr. Biden’s tax plan includes elimination of the tax basis “step-up” for property transferred at death, subjecting that appreciation to income tax at the date of death (it appears to be the case, even if the heirs expect to retain the assets). If enacted, these provisions will significantly add to the tax costs of transferring assets (including privately-held business interests) at death. This is especially noteworthy in that Mr. Biden’s proposed tax plan would look to nearly double the tax rate on capital gains, from 23.8% to 43.4%, for taxpayers earning more than $1,000,000.
It is unclear as to whether the appreciation would be taxed on lifetime transfers through gifting. Currently, that does not appear to be the case, but the-step up noted above has not historically applied to assets gifted during one’s lifetime. Additionally, while Mr. Biden’s tax plan does not seem to include a decrease to the lifetime exclusion, it has long been a priority of Democratic tax writers to reduce this amount to at least $5,000,000.
These proposed outcomes, in combination with the current state of the economy, provide some positive planning opportunities for senior-generation business owners to move equity ownership from their estates to junior-generation family members. Few times in history have offered such profound opportunities for individuals wishing to move forward with asset transfers.
Certainly, no tax planning considerations are more important than the efforts and sacrifices being made to fight the effects of the Coronavirus. However, remember that such a strategy does provide some positive opportunity in the aftermath of this pandemic. As always, we are ready and able to prepare “qualified appraisals” to meet your and your clients’ needs in estate and gift taxation, as well as any other circumstance that you may find require these services. We hope that you and yours safely navigate through this ordeal and wish for a quick recovery for all.
For more information or assistance in this matter, please contact Melissa Bizyak at 412-338-9313.