The economic downturn, the COVID-19 pandemic, and the 2020 presidential election have created an economic environment where it could be time to reconsider your estate plan.

The pandemic has made more people think about future security and safety, and business owners are more cognizant of having their affairs in order. The combination of lower valuations, low interest rates, and the potential of an administration change has led many advisors to advocate for gift-giving as soon as possible.

If you’ve been following gift and estate tax legislation, you know that for 2020, a married couple can transfer $23.16 million to their heirs free of estate and gift tax. Absent Congressional action, it will revert to approximately $6.8 million—$5.49 million inflation adjusted for eight years—effective January 1, 2026.

Many may take the simple approach and argue that a taxable estate should use its exemption instead of losing its benefit if the law changes. While that could be the right answer for some business owners, if the plan is rushed and not thought out, it could lead to unintended consequences. These could include a detrimental effect on the owner’s financial plan and the preservation of the value of the business—often an owner’s most valuable asset.

Explore five important factors to consider as you examine your estate plan during COVID-19 and four steps to get you started on any changes.

Five Factors to Consider

While there are many compelling reasons to review your estate plan and utilize lower valuations and the high estate and gift exemptions, it’s imperative that business owners proceed with caution. Take others factors into considerations for the overall health of estate and succession plans.

These factors include:

• Owners’ personal financial plan, cash flow needs, and goals
• Preservation of the value of the business
• Low interest rates
• Family dynamics
• Income tax issues

Below is a deeper dive into some of these topics.

Owner’s Personal Financial Plan

With every estate plan, the owner’s personal financial plan and cash flow needs should be paramount.

It doesn’t make sense to gift cash flow-producing assets if the owner needs that cash flow for their personal needs. It’s critical to ensure the result of any gifting strategy is consistent with the owner’s lifestyle and retirement needs.

Estate Planning Goals

An estate plan should include:

• Non-tax goals and wishes—for example, values that pass on to heirs
• Determination of who will receive assets
• Gifts to charity
• Concerns related to succession planning
• Federal and state estate tax planning

Lower Valuations Resulting in the Potential for Reduced Estate and Gift Exemptions

For some, the economic downturn could lead to lower valuation for business assets. There‘s speculation that the outcome of the 2020 presidential election could result in a change of administration and a potential reduction of estate and gift exemption prior to 2026.

If the exemption is reduced, those who haven’t used the higher exemption will lose its benefit.

Historically Low Interest Rates

Interest rates are at a historic low. A low interest rate environment is generally favorable for sophisticated estate planning strategies.

Some strategies transfer assets to a trust in exchange for a note or an annuity. The amount returned to the transferor is dependent upon current interest rates. The higher the interest rate, the less beneficial the strategy.

Since the interest rate are at historic lows due to the COVID-19 pandemic, the effectiveness of these strategies has increased.

Wealth Preservation and Family Harmony

The purpose of gifting assets at the present time is to reduce the eventual estate tax burden on owners. However, ownership should be transferred in such a way that the ownership structure doesn’t lead to a potential reduction in the value of the underlying asset.

Over the years—particularly when the estate and gift exemption was quite low—many business owners gifted interests in the family business to their children, so the appreciation in the value of the business grew outside of the owners’ estate.

If this isn’t done properly, family disputes and marital discord could lead to strife and damage to the value of the business. To avoid such disputes, the gifting strategy should remain consistent with the owners’ succession plan.

Income Taxes

In addition to estate and gift taxes, be mindful of the income tax consequences of any estate planning strategy. When someone passes away, the assets in their estate get a step up in basis for income tax purposes, but assets gifted during lifetime don’t receive a basis step up.

If the exemptions aren’t reduced, using all gift exemptions today might not be the most income tax efficient strategy.

Another area that should be considered is state income taxes. In certain circumstances, a gifting strategy can be employed that may minimize state income taxes. This should be considered as part of the plan particularly for business owners that live in high income tax states.

Four Next Steps

Estate planning can seem overwhelming and lead to avoidance or the desire to just simply gift assets, but either of those strategies could produce poor results. Taking the process in a phased approach can achieve better results.

Here are four questions to ask yourself while getting started.

1.    Have you undergone an estate plan review?

Due to the COVID-19 pandemic, mortality and the need to understand your current estate plan is top of mind. A simple estate plan review can help you understand what would happen in the event of your death under your current plan.

This would include:

• Determination of where your assets would go upon your death
• Estimated estate tax that would be owed upon your death or the death of the surviving spouse
• Liquidity analysis to determine how the estate tax would be paid

2.    Does your current plan achieve your goals? 

Consider what is really important to you, the legacy you want to leave, and the concerns that keep you up at night.

These will all be important factors to help make sure the plan truly fulfills your goals and wishes.

3.    Have you updated your personal financial plan and taken estate planning recommendations into account?

Once you understand your current estate, determine if it achieves your goals and identifies some opportunities. The next step would be to create or update your personal financial plan, and get a better understanding of your succession plan or exit strategy.

Once you understand your cash flow needs and your exit strategy, you can work with your advisors and receive some recommendations around an estate and gifting plan that will be consistent with:  

• Personal cash flow needs
• Tax efficiency from an estate, gift and income tax standpoint
• Exit strategies
• Wealth preservation strategies
• Family dynamics

4.    Have you implemented your plan?

After reviewing the plan, you can then move forward with:

• Drafting the documents
• Obtaining the valuations
• Filing the appropriate tax returns

We’re Here to Help

Uncertainty from the COVID-19 pandemic and subsequent economic disruption has created a window of opportunity for those who are willing to act.

However, acting too hastily could lead to not making the best decisions. On the flip side, if you’re paralyzed by the uncertainty, you could pass up an opportunity to provide more to your intended beneficiaries.

For insight and help analyzing your current plan and then mapping the best course forward, contact your Moss Adams professional.