COVID-19 has brought death and destruction from disease that the United States hasn’t experienced since the Spanish Flu pandemic of more than 100 years ago. It is causing wide spread sickness, and in the case of more than 50,000 instances in this country, the deaths of people ranging from the very young to the very old to all age groups in between.
It is also wreaking as much economic harm as it is physical harm. As the country succumbed to the virus, values of marketable securities went into free fall and are now worth far less than immediately before the Coronavirus hit. And when the values of blue chip stocks fall so far, the appraised values of closely-held business interests are likely taking just as large of a valuation reduction if not more. In addition, IRS mandated rates for estate planning transactions done in May 2020 range from a low of .25% to 1.15%.
It is this current economic picture of depressed business values and rock bottom low interest rates that creates an estate tax savings and business succession planning opportunity that you may never see again in your lifetime. The opportunity works like this. An interest in a substantially depressed business is transferred to other family members or to trusts for their benefit. Using a variety of techniques that are available under the Internal Revenue Code, this can often be done without having to use up much of the estate tax exemption that will reduce estate taxes when you die. Once the business interest is transferred, the future appreciation on that interest over and above the very low interest rate applicable to the transaction will not be part of your estate for estate tax purposes. Although you transfer an interest in your business, in many cases the transaction is structured so that you remain in sole control of the business and its operations.
A simple example will illustrate this point. Let’s assume that you have a business interest that immediately before the effects of COVID-19 were known, had a value of $2 million. It now, however, has a value of 40% less, or $1.2 million. Once the transfer is made, the immediate effect is that you have removed $800,000 from the transfer tax system. But if history repeats itself, the markets at some point will come roaring back, just as they did from the great recession a decade ago. As the markets come back, all of the appreciation on the transferred interest is also removed from your estate for estate tax purposes. Accordingly, if you make this transfer today, and then live for another 20 years, and the value of the $1.2 million interest transferred doubles every ten years, then at your death, the result is that $4.8 million will have been removed from your estate for estate tax purposes. At today’s 40% estate tax rate, the result is estate tax savings to your family of $1,920,000.
In terms of instituting this type of planning, or any other type of estate planning to protect you and your family, the safety of our clients and prospects, our employees and our attorneys is paramount. Accordingly, we are endeavoring to follow the advice of our healthcare professionals in terms of limiting our contact with others and following social distancing guidelines. But that does not mean you cannot begin planning while the opportunity is here. We at AEGIS Law are working full time and meeting regularly with our clients through telephone conferencing or video Zoom conferencing.
If you feel the time is right for you to talk with us about your estate planning, please contact Steven Spewak by firstname.lastname@example.org or (314) 884-2152.