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COVID-19, Business Valuation and an Election Year: A Unique Opportunity for Estate Planning

The Coronavirus pandemic has been unsettling, disruptive, and stressful. Our priority right now is to do all we can to look after each other while practicing social distancing to mitigate the spread of the virus. In such a situation it can be difficult to think of opportunity. Yet now is a perfect time for owners of private businesses and assets to engage in thoughtful estate and gift planning.


The convergence of two key events – (1) a substantial decline in business and asset values caused by the Coronavirus pandemic and (2) an upcoming election year that brings the possibility of substantial changes to currently favorable estate tax policy – make a compelling reason to gift assets now.


Low Business and Asset Values


Lower business and asset values enable business and property owners to transfer a greater portion of their assets, thereby reducing their taxable estate and future exposure to estate taxes. Several factors contribute to an environment of low asset values. These include:


· Lower valuation multiples. It should be no surprise that the current environment has resulted in significant declines in valuation multiples in many industries – most obviously the travel, restaurant, and hospitality industries, but in many others as well. Lower multiples mean lower business values for a given level of income.


· Sharp decline in business earnings. Actual or projected income is substantially down due to Coronavirus-related closures and social distancing, declines in demand and disruptions to the supply chain. When businesses will recover is anyone’s guess. Lower income means lower asset values.


· Lower values of asset holdings. Companies with significant asset holdings may find their balance sheets depleted. Holdings in public stocks and securities have declined in value as stock prices plummeted. Accounts receivable are likely impaired as customers’ ability to pay suffers. Inventories might similarly be worth less due to a decline in demand. And real estate holdings are likely valued less due to increases in vacancy rates and inability of tenants to pay during the pandemic.


· Higher valuation discounts for noncontrolling interests. Discounts for lack of marketability are typically much higher during times or risk as investors flee to safety. Studies show that discounts are positively correlated with measures of stock volatility such as the VIX index. High valuation discounts result in lower business interest values.


· Valuation discounts for controlling interests. In the current environment, even a controlling business interest may be subject to a substantial liquidity discount, as transaction activity grinds to a halt and it becomes harder than ever to sell a private business.


Risk of Changes to Current Favorable Estate Tax Policy


Presidential and congressional elections anticipated for later this year bring uncertainty as to future estate tax policy.


Estate and gift tax exemptions have been extremely favorable under the recently enacted Tax Cuts and Jobs Act of 2017 (“TCJA”). Presently, the exemption amount is $11.58 million in 2020 or $23.16 million for a married couple. The exemption is scheduled to revert to approximately $6.0 million in January 2026.


Based on proposals, current exemptions would likely change drastically under a different administration. Specifically, presidential candidate Joe Biden is currently looking to tax unrealized appreciation in decedents’ assets at time of death. Additionally, the current exemption amount would likely be rolled back to a much lower pre-reform exemption amount of $3.5 million.


Call to Action


Low asset values and a favorable tax environment subject to change is a perfect time for strategic estate tax planning. While this may be a difficult time for all, those who act now may save millions and help preserve their legacy for future generations.


Questions?


We at Grobstein Teeple are here to help with your planning and valuation needs. If you have any questions, please contact one of our experts:


William Thomsen, Director

Kermith Boffill, Partner

Jeffrey Leonard, Partner


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