The coronavirus outbreak has resulted in thousands of lives lost, halted the global economy, and plunged markets into recession levels. There is not an abundance of good news right now, but there are some silver linings if you are wise in your estate planning.
Certain opportunities arise under circumstances when investments lose a significant value over a relatively short period of time. Here we will discuss why now is a good time to make gifts in the form of stock market assets. In addition, if one of your loved ones recently passed away, you might be able to take advantage of electing alternative valuation for a lower estate tax liability.
Gifting Assets While Market Value Is Low
The federal estate tax exclusion is $11.58 million for individuals, an amount doubled through 2025 by the Tax Cuts and Jobs Act of 2017. If you anticipate that you’ll have a taxable estate, simply giving away assets may be advisable. The annual exclusion, which is the amount of money that one person may transfer to another without incurring a gift tax or reducing the amount you can give tax-free at death, is $15,000. This transfer can also include assets—like stocks for example.
During a period where the markets have declined substantially, as they have in 2020, you may have the opportunity to gift stocks while they are at a reduced value. You get more untaxed bang for your buck with your gift.
For example, say you want to make an annual; exclusion gift of $15,000 to someone. You could give cash. But you could also give a gift of stock. Let’s say you bought a stock you think has a lot of potential for $100 per share. It increased to $200, but recently declined back down to $100 during the pandemic. Gifting the stock now means you could transfer 150 shares to each beneficiary and be within the annual exclusion. That means you can gift twice as many shares to each individual now compared to before the COVID-19 market crash. If the stock goes back up to $200 per share, the beneficiary now has $30,000 and you didn’t use any of your lifetime gift tax exemption amount.
Electing Alternate Valuation
If you recently lost a loved one who had a taxable estate, you might have an opportunity to take advantage of declining market values by electing an alternate valuation. Usually, an individual’s estate value for estate tax return purposes is calculated at the time of death. However, you may have the option to use an alternate valuation date that is six months after the time of death, provided that the assets were not sold or distributed.
Using the alternate valuation date can reduce the amount of estate tax that’s due if one or more assets should lose a significant amount of value during the six months after death. An estate valued close to the $11.58 million exemption amount can benefit greatly.
For example, if an estate valued at $12.58 million at the time of death is valued at $11.58 million now, that would result in a savings of $400,000 using the alternate valuation—40 percent of $1 million. Should the value the estate fall below $11.58 million, you would not be liable for any estate taxes at all!
To be eligible to use alternate valuation, doing so must reduce the value of the estate and the estate tax amount. For example, if the assets were going to a surviving spouse, there would be no taxes at that time, and electing alternate valuation would not be a viable option in most circumstances.
Advanced Estate Planning Strategies
Now is the perfect circumstance for persons with very large estates to utilize certain estate planning strategies to reduce or eliminate gift tax and state estate tax. Many estate planning strategies are based on interest rate calculations, and with interest rates at historic lows, the savings that can be obtained can be in the millions of dollars. Substantial leverage can be obtained by combining assets with currently depressed values, discounting strategies allowed under the tax law, and sage estate planning, business succession and tax planning advice.
Call the estate planning attorneys at Sandoval Legacy Group at 951-787-7711 to schedule your free advanced estate planning initial consultation. During that initial consultation we will evaluate your assets, the many strategies available to you and the persons you want to benefit in order to give you recommendations on how you may want to proceed with the transfer of your wealth in the most advantageous way.
Please continue to take the COVID-19 seriously and with an abundance of caution. Practice the recommended social distancing. While we must do what is necessary to stay safe, we must also take steps to get our economy up and running again. That is the best way to support each other and the fastest way back to normalcy.
Have a question? Ask Dennis.
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