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High lifetime gift exemptions coupled with lower asset values create a unique opportunity to leverage and efficiently transfer assets. Now is the time to act.
The Tax Cuts and Jobs Act of 2017 (“TCJA”) temporarily increased the Federal estate, gift, and generation-skipping transfer tax exemption to $10.00 million per person for tax years 2018 through 2025 with an annual inflation adjustment. As of 2020, each individual can gift $11.58 million (married couples can transfer $23.16 million) during his or her lifetime without incurring Federal gift or estate tax. Once the applicable individual or married threshold is reached, a flat Federal gift tax of 40% is applied. These unprecedented lifetime exemptions, however, will sunset at the end of 2025, if not sooner. Beginning on January 1, 2026, the exemption will revert to the 2017 level of $5 million as adjusted for inflation.
The lifetime exemption is often used to transfer assets from one generation to the next. Assets such as publicly-traded securities, interests in privately-held businesses, and real estate are some of the more common assets transferred. The question is -- why is the gifting opportunity under the TCJA particularly relevant today? The answer is simple -- COVID-19.
COVID-19 has caused economic volatility and uncertainty. COVID-19 initially brought the longest bull market to a screeching halt. Despite the fact that the stock markets have returned to bull market territory, not every sector, industry or geography has experienced a rebound. Significant disruption remains with some industries and geographies disproportionately impacted. In fact, in the second quarter of 2020, the United States gross domestic product contracted at a staggering annualized rate of 32.9%.
Volatility and uncertainty have caused many businesses’ risk profiles to increase at a time when traditional access to debt and equity capital markets is shrinking. Congress and the U.S. Treasury Department intervened to halt contraction in these markets through stimulus programs. The CARES Act and Economic Disaster Recovery Loans offer temporary respite. Nevertheless, without a vaccine or proven medical therapies to quell this pandemic, the economic volatility and uncertainty will remain.
The stakes are high as some businesses will thrive and others will fail. Fiscal prudence in managing cash flow, meeting debt covenants and delivering current earnings is critical in moving from one day to the next, so examining the long-term outlook is more challenging. Volatility and uncertainty, however, have resulted in lower valuations of numerous asset classes. This is due to depressed financial projections, and increased industry and company-specific risk, to name a few. COVID-19 valuation adjustments have been wide-ranging and dependent upon the decline in cash flow and the projected duration of the event. Common adjustments include increases in the discounts for lack of marketability and cost of equity capital. The adjustments of 200 to 300 basis points can have a significant impact on the valuation conclusion.
The uncertainty is not only economic; it is political. We are less than ninety days away from election day. Irrespective of the political outcome, it is clear that this Spring’s stimulus programs will need to be repaid. This will likely lead to increased taxes. The form and timing of those changes is unknown. This uncertainty increases the likelihood that the TCJA sunsetting will take place at the end of 2025, if not sooner, should a new administration be voted into office this year or in 2024.
This makes it imperative for those who are considering gifting to meet with their tax professional and legal counsel now to position themselves appropriately during these uncertain times. An opportunity may exist where assets can be transferred more efficiently utilizing the current, favorable tax environment with potential lower asset and equity valuations.
Ensuring that assets are valued appropriately is essential to achieving the maximum benefit of these gifting strategies. In addition, meeting the IRS adequate disclosure standard by attaching a qualified appraisal prepared by a qualified appraiser, to the annual gift tax return, will ensure that the IRS statute of limitations will expire three years after the filing of the gift tax return. This is especially important since the IRS has provided guidance that any gifting made under the current law will be honored, even if the total amount of lifetime gifting exceeds future lower lifetime gift exclusions.
Gifting is a personal decision that involves individual goals, an assessment of assets and spending needs, the desire to create a legacy, and many other factors including timing. The confluence of COVID-19, the election, the lifetime exemption sunsetting and market volatility, make now the time to consider making gifts that are supported by a qualified appraisal, which substantiates the asset’s value.
Join us for a webinar on September 16th where we will discuss this topic further. Click here for more information and to register.
DGC’s Private Client Group and Advisory Practice work closely together to ensure all aspects of a client’s situation are considered, and appropriate strategies are implemented. This collaboration about gifting strategies, valuation and other forward-looking planning techniques is critical.
To further discuss this, contact:
Laura Barooshian, CPA, MST, AEP, CAP at 781-937-5332 / firstname.lastname@example.org
Kimberley Train, CPA, ABV at 781-937-5112 / email@example.com
Jon Klerowski, CPA, ABV, CFE at 781-937-5729 / firstname.lastname@example.org
Sahri Zeger, JD, MBA at 781-937-5774 / email@example.com