The coronavirus (COVID-19) has resulted in significant public market losses, as reflected in daily stock market gyrations and volatility. Private companies and asset values have equally been affected by the pandemic as investor appetite for riskier, illiquid investments is materially impacted in these conditions. This article series discusses strategies for companies and High Net Worth families and individuals that can provide a silver lining amidst the tough news and provide long-term benefits when valuations rise again. You can also download the whole article as a pdf.
Time for Gift & Estate planning moves – “Use it or Lose it”
Make a Gift or Transfer shares or property into a trust
- Gift tax generally is imposed on non-charitable gifts in excess of $15,000 annually per donor per donee that exceed one’s lifetime exclusion (currently $11.58M, $23.16M for a married couple; individual exclusion scheduled to be reduced on Jan. 1, 2026 to $5M, adjusted for inflation).
- There is speculation that the exemption could be reduced sooner, depending on the 2020 election
- US Treasury has clarified that a gift that uses the current exemption will not be affected later upon death of the donor if the exemption amount is later reduced
- As result there is a “use it or lose it” element to current planning for HNW families and individuals with taxable estates
- Any such transfers must be recorded at their fair market value at the time of the transaction, and counts against annual and lifetime exclusion limits – which are subject to change in 2026 and possibly sooner
- Anything that is beyond the exclusion limits is subject to significant tax
Why Act Now?
- The current environment of depressed asset values, low interest rates and a high exemption amount opens up critical planning opportunities.
- Due to COVID-19 impacts, the IRS has issued very low interest rates applicable to intra-family transactions undertaken in May 2020.
- Additionally, the value of private companies/holdings and real estate holdings have been severely impacted by the volatility
- This represents a unique opportunity for HNW individuals and families to achieve large wealth transfer tax savings now
- The current lower values present an opportunity to make gifts of shares or property that are expected to appreciate substantially in the future and use less of the lifetime exclusion. This property also could be sold to family members at the current low values. Furthermore, intra-family loans can be made at extremely low current minimum interest rates.
What to Do?
- Top Strategies include:
- Sales to an Intentionally Defective Grantor Trust (GT): A grantor could sell assets to an GT in exchange for a promissory note bearing interest at the Applicable Federal Rate (AFR). For May, that rate is 0.25% with maturity dates under 3 years, 0.58% for 3-9 yrs, and 1.15% for 9+ yrs. No gain is recognized on the sale and interest payments to the grantor are not subject to income tax. Any income/appreciation on the asset (beyond the AFR) pass to the beneficiaries free of gift tax, estate tax and generation-skipping transfer tax.
- GRATs: a grantor retained annuity trust (GRAT) returns to the grantor the value of the initial contribution plus a certain rate of return (the “Section 7520 Rate”; “S7R”) over a set period of time (typically two years) and transfer to the beneficiaries all income & appreciation on the trust assets in excess of S7R free of tax. For May, the Section 7520 Rate is 0.8%. This rate, combined with current depressed asset values, create optimal conditions for a GRAT strategy to successfully transfer wealth. A GRAT strategy can also be used by those who have used up their lifetime exclusion amounts, as it is typically structured such that the gift tax value is zero.
- Gifts: for anyone who has not used their full exemption, this is an opportune moment to act now. It can save significant wealth transfer tax as all future appreciation will be excluded from the transferor’s taxable estate.
- Donor and donee in executing an optimal transfer of wealth and maximizing the value of what’s transferred by minimizing the tax impact
Overall, this may be an opportune moment to either reset a prior valuation or to get a new valuation commissioned. In many cases, it may be prudent to consider/review whether the value calibrates in another 6-8 months as things settle down and greater visibility reveals itself as to COVID-19 impact and forward-looking performance. But whatever you do, make sure your actions are well documented and defensible in light of financial and valuation principles.
The one lesson of any downturn is that, when the dust clears, all of these actions are reviewed in a different world and often subject to fierce challenge. If you are a company that is angling towards an exit or an IPO, rest assured that buyers’ diligence teams, the SEC and the IRS review stock awards closely.Download the full article
How can we help?
If you are a current Oxford client, we recommend that you reach out to discuss whether you or your company can benefit from any of these strategies. If you are not currently a client, we are more than happy to discuss this with you and help you in thinking through the best path forward. To learn more contact OVP or email us at email@example.com to set up time to talk.
Oxford Valuation Partners