Move Forward with Your Estate Tax Planning Before it is Too Late

Bilzin Sumberg Publication
Client Alert
August 19, 2020

While it is hard to imagine there could be anything advantageous about today's uncertainties and depressed asset values, the following factors, coupled with historically low interest rates, have made it an opportune time to transfer wealth:

Depressed asset values related to COVID-19
Increased opportunities to take greater discounts on valuations given market uncertainties
Low interest rates on intra-family loans (e.g., the current mid-term and long-term rates are 0.35% and 1.0%, respectfully)

As we all look toward the future and start assessing how we will move forward, it is imperative that you consider your long-term goals regarding your wealth and that you act now.  If history has taught us anything it is that both humanity and the economy are resilient. Eventually, things rebound and those who planned while things were down come out of the struggle stronger and wealthier. 

As part of your long-term planning analysis, this year's November election should be kept top of mind, given its possible effects on our future tax laws. In December of 2017, President Trump signed into law the Tax Cuts and Jobs Act (the "TCJA").  Pursuant to the TCJA, as of January 1, 2018, the amount that an individual can transfer to others without being subject to the 40% estate and gift tax is $11.58 million (commonly referred to as the "estate and gift tax exemption").  

The TCJA further provides that effective January 1, 2026, the estate and gift tax exemption reverts to $5M (as indexed for inflation).  While Joe Biden has not released information about his specific plans for the estate and gift tax exemption, given his stated desire to roll back the TCJA's benefits on the wealthy, many analysts anticipate a return to a pre-TCJA estate and gift tax exemption of $3.5 million.  Both current law and the possibility of Joe Biden becoming the next president of the United States present a use-it-or-lose-it situation. Failing to use the increased estate and gift tax exemption may very well result in your never having the opportunity to use it at all.

So what should you do now?  While declining asset values and increased uncertainty make it more difficult to part with assets, both economically and psychologically, if your estate is greater than $3.5 million (or $7M combined for spouses), you should be seriously considering your tax planning right now. 
Some properly implemented strategies may minimize or potentially even eliminate the 40% tax bite that would otherwise apply had no planning been implemented.  Some strategies may allow you to retain access to an income stream that may be estimated or determined before implementing the strategy (minimizing the concern that you may in the future need the assets you parted with today).  Some careful planning today could pay hefty dividends tomorrow.

As an example, if you owned an asset (for instance, a retail shopping center) that is worth $10M (based on pre COVID-19 valuation) that you wish to transfer for the benefit of your children, at the current time you may be able to obtain an appraisal that values the asset at $7M, along with a further discount of 30%.  The end result is the ability to transfer a $10M asset, at a $4.9M gift tax value.

Now is the time to reach out to your tax advisor to discuss your current situation - it may very well be the most profitable conversation you ever have. Failure to plan today may result in a complete loss of these unique opportunities as early as January 2021.

Mildred Gomez
Jennifer J. Wioncek
Practice Group Leader, Tax & Private Wealth
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