Gifting and Estate Planning: Is It Time to Act?

Michael Perez, Director

The presidential election is upon us, and estate and gift tax exemptions are unprecedentedly high. But how will tax exemptions change after November? Understanding your worth is important to preserving your assets for your heirs.

It’s no secret that the outcome of the presidential election will have a direct impact on the future tax burden of individuals and families. Taxpayers should consider using their 2020 $11.58 million gift and estate tax exemption.

The gift and estate tax exemption is the amount that each individual may use to transfer property either during their lifetime or at their death without incurring a 40% tax under current federal law. This amount is scheduled to sunset at the end of 2025 with a reversion to $5 million indexed for inflation. Genuine concern exists that the current window of opportunity to effectuate a wealth transfer may eliminate sooner depending on the outcome of the presidential election.

The Tax Cuts and Jobs Act was effective prospectively to the beginning of 2018. It is, however, not outside the realm of possibility, that any future federal tax legislation passed in 2021 could be retroactive to January 1, 2021. Vice President Biden has called for “returning the estate tax to 2009 levels,” which implies the top rate would increase to 45%, and the gift and estate tax exemption would be $3.5 million per taxpayer. Biden also indicated that he would repeal the step-up in basis, which occurs when an appreciated asset is passed to heirs. Election-related concerns coupled with the economic downturn and increasing deficits caused by the COVID-19 pandemic could make increases in the estate tax an attractive option for enhancing revenue regardless of who wins the election.

The outcome of the election and extent of the downturn is unknowable, and the risk of a second wave of infection casts doubt on the recovery. The net effect of this uncertainty has resulted in higher risk premiums for impacted businesses leading to lower asset values.

In such an environment, now may be an optimal time to consider estate planning strategies. Transfers of interests held in entities require concise execution, and valuation support from a credible and independent valuation firm is critical. To minimize IRS scrutiny for valuations care needs to be taken to ensure that the valuation analysis is supportable, based on well-reasoned assumptions, and consistent with all of the existing revenue rulings and tax court cases available to the valuation profession.

SEG professionals are practiced in determining discounts for lack of marketability, control, and built-in-gains in complex ownership and legal structures. Our valuation experts are knowledgeable about the most recent applicable tax court cases, legislation, and related revenue rulings. We consider all relevant rulings specifically applying to estate planning and the application of minority interest discounts to assets owned by family members.

At SEG, we work with estate planning attorneys, business owners, taxpayers, and their advisors to value and document the transition of ownership. If you are interested in learning more about how an experienced valuation advisor can help you navigate these important and complex issues, we would love to hear from you. Contact Chris Kramer at | (714) 380-3300 or Michael Perez at | (714) 380-3304

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