The Pandemic Effect: Estate Planning

Is Now the Best Time for Estate Planning?

The easy answer to the question above is YES!  As many continue to reel from the COVID-19 pandemic with job losses exceeding 20 million and double-digit declines in most investment assets, the last thing on many people’s minds is saving on estate taxes.  But, just maybe, there is a silver lining to this COVID-19 cloud in the form of estate planning.

There are three main factors that have come together to create the “perfect storm” for estate planning: 1) Historically high estate tax exclusions, 2) Reduced asset values, and 3) very low-interest rates.

Current Estate Tax Exceptions

The Tax Cuts and Jobs Act (TCJA) of 2017 nearly doubled the estate tax exemption to $11.2 million per person (up from $5.5 million in 2017) and $22.4 million for married couples (up from $11.1 million in 2017).  The current exemption is set to decrease to around $6 million per person at the end of 2025.

Obviously, those with estates at or above the current exemptions would be wise to take advantage of the current exemption levels to protect more of their assets from estate taxes.  However, even for those with estates that fall below the current exemption figures, now is also the time to act.  Preparing an estate plan now will allow them to take advantage of the current exemption before its scheduled reduction at the end of 2025.  Despite the current timeline, if this year’s Presidential election results in a new administration, that timetable may be shortened and the exemption level could be reduced even further.

Reduced Asset Values

Between February 19, 2020, and March 23, 2020, the S&P 500 index fell approximately 34% and the Dow Jones Industrial Average fell approximately 36%.  Although both indices gained approximately 30% from their lows as of April 30, 2020, the S&P 500 index remains approximately 14% below its pre-COVID high, while the Dow Jones Industrial Average remained approximately 17% below its pre-COVID high.  For those with privately-held businesses, the change in value is not as apparent as there is no daily trading price to reference.  However, this does not mean that privately-held business have escaped this decline in value, as they not only face the same market forces that pushed valuations downward in the public markets, but also increased shareholder (or member) liquidity issues.   A qualified appraiser, such as Vantage Point Advisors, can help calculate the fair market value of privately-held assets and provide a valuation report that is compliant with IRS reporting standards.

In many cases, it may not be in the best interest of investors or business owners to sell their assets at this point.  However, it is a good time for estate planning with these assets as more (either more assets or larger ownership interests) can be transferred now as opposed to pre-Covid-19 for a given value.  In addition, performing estate planning now will allow the future growth of those assets to occur outside of the estate.

Low Interest Rates

As of April 30, 2020, the Federal Funds rate was 0.05% (compared to 2.45% as of April 30, 2019) and the Prime Rate was 3.25% (compared to 5.5% as of April 30, 2019).  However, arguably, the most important rate when it comes to estate planning is the Applicable Federal Rate (AFR) pursuant to Internal Revenue Code §7520, which stood at 0.8% for May 2020 (compared to 2.8% for May 2019).  In fact, there is some disagreement that the rate should be even lower, at 0.6%, based on the prescribed calculations.

What is the AFR and how does the low rate benefit individuals?  The AFR is the rate allowed by the IRS for determining the present value of an annuity, an interest for life or a term of years, or a remainder or reversionary interest.  In general terms, the AFR is used in estate planning tools like GRATs and intra-family loans.  These tools become even more powerful with a low AFR as it reduces the amount that must be paid to the grantor in these scenarios.

Conclusion

The combination of the above three factors makes this an advantageous time to perform estate planning and make the most out of these confusing times.  In addition, many families who previously found it difficult to find the time to discuss estate plan issues together, now find themselves at home together with time to discuss estate planning issues.  Many estate planning attorneys are coordinating estate plans via Zoom meetings, which is both convenient and efficient, even with small children in the home.

Be sure to contact an estate planning attorney today to explore your options and make sure to follow IRS regulations and hire a qualified appraiser to handle the valuation of any privately-held assets included in your estate plan.

If you’re looking for more information on business valuations or just need some advice, contact us today.

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Todd Larson, ASA is a Director at Vantage Point Advisors with over 20 years of consulting and valuation experience. Mr. Larson holds a Bachelor of Science in Finance & Accounting from California State University Northridge (CSUN) and a Master of Business Administration from the University of Southern California (USC). Mr. Larson is also a Lecturer at CSUN teaching finance and computer courses.