With a global economic recession on the horizon, now might be a good time to structure a gift to the next generation or into a trust.
What is developing around COVID-19 is both disconcerting and frightening. Nevertheless, we try to press on as best we can and control what we can control. For business owners, that could be estate planning—including gifting, selling or transferring a business interest at a discounted value into a trust or other vehicle designed to prevent the business interest and its future appreciation from being applied to the business owner’s estate.
The change in the tax laws at the end of 2017 increased the lifetime gift and estate tax exemption. For 2020, the exemption is $11.58 million per person. Any value above that $11.58 million is subject to a tax of up to 40%. Business owners must also consider estate taxes at the state level. For instance, the threshold for Massachusetts residents is $1 million.
The current federal estate tax threshold of $11.58 million per individual is set to sunset at the end of 2025. Thereafter, the exemption could return to the pre-tax reform level of $5 million for an individual taxpayer. Given potential austerity measures in response to the COVID-19 pandemic, it is conceivable that the estate tax exemption could be phased out before the increase is eliminated in 2026.
Business owners are thus faced with a use it or lose it situation at the federal level. Current gifts can use the full exemption of $11.58 million, while future transfers of a business interest may be subject to a much lower exemption amount (i.e., $5 million).
You can make gifts up to $15,000 a year per individual with no reporting requirements. If you make larger gifts, they need to be reported. To achieve this, a formal valuation is necessary to establish a value to be used with the purpose of accounting for what is transferred.
With a global economic recession on the horizon, now might be a good time to structure a gift to the next generation or into a trust. As a result of the economic crisis, business valuations are low. Combined with valuation discounts, business owners can pass a greater share of their business to their heirs and eat up less of the estate tax exemption.
Disclaimer: Any written tax content, comments, or advice contained in this article is limited to the matters specifically set forth herein. Such content, comments, or advice may be based on tax statutes, regulations, and administrative and judicial interpretations thereof and we have no obligation to update any content, comments or advice for retroactive or prospective changes to such authorities. This communication is not intended to address the potential application of penalties and interest, for which the taxpayer is responsible, that may be imposed for non-compliance with tax law.
Please submit your inquiry or questions using the form below and we’ll get back to you shortly.