Here’s a Silver Lining for Your Estate Plan.
The Covid-19 pandemic has brought with it significant collateral damage and thrown shrapnel everywhere. But for some business owners, there could be a significant estate planning opportunity to seize.
The collateral damage caused by the novel COVID-19 coronavirus may provide a potential “silver lining” in the form of a more favorable valuation environment for estate, inheritance, and gift tax-minimization.
Many family business owners struggle with the challenge of having to minimize estate taxes. Poor estate planning can force a family to sell assets they may otherwise want to keep, such as the family business or other important holdings. For families where maintaining the business may not be a priority, it likely would still be advisable to minimize future estate tax payments.
Combined with government limits on how much one can gift, family businesses are left virtually handcuffed when it comes to moving company stock to children. Yet under the current environment, a relevant business valuation can reduce estate, gift, and inheritance tax liability.
The Current Environment
Many business owners are presently dealing with falling revenues and profits due to the COVID-19 pandemic. Subsequently, albeit temporarily, a decline in a business’s valuation may present a significant estate-planning opportunity.
Consider that current federal estate taxes permit individuals to pass up to $11.6 million of assets tax-free ($23.2 per couple), amounts beyond that are taxed at roughly 40%. More importantly, those amounts are set to be cut in half to $5.8 million per person ($11.6 per couple) in 2026 unless Congress acts to make the current law permanent.
Plan Basics
As mentioned earlier, once the extent of the COVID-19 collateral damage to your business can be assessed, get a third-party valuation for estate planning purposes — this is different from a third-party sale valuation.
In simplest terms, consider that a business that was previously valued at $30 million before the COVID-19 pandemic may now be worth about $20 million (temporarily). Next, the business owner gifts $8 million of non-voting shares to his two children. As it is discounted for minority-owner purposes, the $8 million is actually worth $6 million. As the rebound begins and the company returns to its $30 million pre-pandemic value, the owner has removed over $12 million of estate assets while only using $6 million of the $11.6 million government allowance. In this example under current law, the business owner could save about $2.4 million in estate taxes and $4.8 million under the 2026 law. (Note: there can be penalties for undervaluing assets without reason.)
The Bottom Line
If the value of your family business has decreased due to COVID-19, get a fresh valuation. Consider gifting a portion at a reduced level to potentially save on federal estate taxes while the business value recovers.
Business-transition planning is often about a lot more than selling your business. It’s about identifying and obtaining what you need to help transition into your next “life phase.” Is your priority to get maximum value or might you prefer to keep it in the family or sell to employees? Will the sale enable you and your family to live the life you’ve worked to achieve? Your transition plan should reflect these and other key business and lifestyle factors while coordinating with your broader estate plan. A forward-looking approach such as this can help ensure that you get what you most want from the sale of your company while minimizing federal estate taxes.
