The novel “coronavirus” (also called “SARS-CoV-2”) causes the disease “COVID-19.” It first appeared in late 2019 and was reported to the World Health Organization (WHO) on December 31, 2019. Here’s a link to the WHO’s site for the latest global information. At this point, the virus has infected hundreds of thousands of people, including those on every continent except Antarctica.
The spread of the coronavirus has wreaked havoc on financial markets around the world. While nobody would seek out such a decline, it could provide opportunities for some people. This is the first of a two-part series of articles on strategies to consider under these circumstances. This first article looks at gifting and electing alternate valuation. The second article will look at the Grantor Retained Annuity Trust, or “GRAT,” and how that strategy might be used in these circumstances.
The first strategy to consider is simply giving away an asset if you anticipate that you’ll have a taxable estate. Everyone can give away $15,000 per year to any other person without reducing the amount they can give tax-free at death, the “annual exclusion.” Doing so while the assets are at a reduced value gets more bang for your buck. While the federal estate tax exclusion is currently doubled, the permanent exclusion is $5 million, adjusted for inflation. Some states have an estate tax exclusion of even less. So, if you would be subject to estate tax, it may make sense for you to give away some assets while they are down in value, especially using your annual exclusion.
For example, let’s say you own XYZ company stock. You bought the stock for $100 per share and it increased to $200 per share but has now decreased back to $100 per share. You could give that stock away to your family now. Let’s say you have adult children you want to benefit. You could give 150 shares, or $15,000 worth, to each child without using any of your lifetime exclusion. When the stock was at $200 per share, you could only have given away half as many shares while fitting within the $15,000 annual exclusion. In other words, due to the decline of the share values, you can now fit twice as many shares into the amount you can give to each person each year without dipping into your lifetime exclusion.
Another way you could take advantage of the decline in market values is if you had a loved one pass away before the coronavirus pandemic and if they had a taxable estate. In that situation, you may want to consider electing “alternate valuation.” When filing an estate tax return, you typically use the value of the assets at the date of their death. However, under some circumstances, you may choose the “alternate valuation” date, instead. If you choose alternate valuation, the date six months after their death is used (unless a particular asset has been sold, distributed, etc., prior to the six-month date).
However, in order to elect alternate valuation, doing so must reduce the overall value of the estate and the amount of the estate tax due. In most cases, there would not have been a tax due anyway and alternate valuation could not be elected, like if the assets are going to a surviving spouse or if there’s not a taxable estate. But if the circumstances are right, this could save a bundle.
For example, let’s say that Harry was single and died on September 15, 2019. Harry’s estate was worth $15 million on that date. Harry’s estate did nothing with the assets and they declined in value to $10 million by the alternate valuation date six months later. Harry had $10 million of estate tax exclusion remaining at his death. Harry would have owed an estate tax of 40% on the excess $5 million for a tax due of $2 million. However, by electing alternate valuation, Harry’s estate is reduced by $5 million and there no longer is a tax due. Thus, Harry’s estate can elect alternate valuation, saving $2 million in federal estate tax.
We all need to pull together to do everything we can to minimize the impact of COVID-19. Social distancing and self-quarantine are important to the mitigation of the impact of COVID-19. Here’s an article from Johns Hopkins explaining social distancing and self-quarantine.
However, while we are doing our part to minimize the impact of COVID-19, we can still use the legitimate Estate Planning opportunities which take advantage of the depressed asset values resulting from the pandemic. Gifting of assets and the election of the alternate valuation date are two of these strategies.
The next blog in this series will look at another strategy to consider in the current circumstances, the GRAT.