This blog is directed at those fortunate enough to have estate tax that will be payable after they pass away.

At present, the joint lifetime exemption for a U.S. citizen or resident alien husband and wife is $23,160,000. For non-resident aliens, the exemption could be as low as $60,000 per person. Therefore those that wish to reduce their potential estate tax should consider making gifts, and particularly in 2020. The political climate is cloudy and if there is a Democratic president along with both houses of Congress in 2021 it is likely the exemption amounts will be reduced accompanied by an increase in estate tax rates. What 2021 brings, no one knows, but here are some things to consider doing this year to reduce this potential tax.

  • Taxable gifts are an effective way to reduce an eventual estate. When the gift is made the asset is removed from your estate as well as the growth in that asset’s value and the ongoing cash flow from that asset.
  • All gifts will need to be valued as of the date a gift is made.
  • Any gifts of minority business interests will further be adjusted in value based on discounts for the lack of control and difficulty in marketing such interests.
  • Business interests can be valued many ways. I posted a blog mentioning eight different ways of valuing the same business, but for gift and estate tax purposes there is a specific method that should be used in most situations.
  • However, a primary driver of value in most situations is the earnings of the entity and the expected return an investor would want to receive from acquiring that investment.
  • Right now we are in a tenuous situation where the values of many businesses have plummeted due to closures and lockdowns.
  • Furthermore, investment return expectations have increased due to the precarious nature of the economy, the burgeoning federal debt, a reduction of tax revenues for the federal and many state governments, the quickly increasing unemployment and the uncertainty of when the recovery will commence and how long it will take to stabilize.
  • The combination of reduced expectations of sustainable cash flow and higher expected investment returns would likely drive down the values of many businesses.
  • That makes now a good time to consider making gifts of interests in family and privately owned businesses. The lower the value the greater the percentage of ownership that can be transferred gift tax-free.
  • Transfers made during lifetime potentially get an added benefit of having any gift taxes paid at a reduced rate when compared to the estate tax paid on that same asset that is owned at death.

This whole area is extremely complicated and has many tax, family dynamics, cash flow and control issues that need to be synchronized. My recommendation for those in this situation is to meet with your accountants, attorneys, financial advisors and estate planners to discuss whether it is advantageous for you to consider making gifts.

There are other methods of planning for estate taxes and this blog just covers this one aspect. I suggest having a comprehensive plan done before moving forward, and now might be the right time for this.

If you have any business or financial issues you want to discuss please do not hesitate to contact me at [email protected] or fill out the form below.


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