Estate, Gift, and Income Tax Planning in the Time of COVID-19: A Primer for Families and Their Closely-Held Businesses

COVID-19 News and Updates | Ladidas Lumpkins | Gabe M. Wolosky | Apr 22, 2020


Covid-19 has unleashed an emotional, physical and financial assault on all of us.  We are all part of the whole; but understandably, we also see the world from our own perspectives.  What are the risks to our health and those near and dear to us?  How do we stay safe? We are just beginning to focus on the economic toll of this devastating pandemic and the resultant loss of jobs and wealth.  What is the new normal and how long will it last? The items below may be prudent first steps to consider.

Estate Tax Planning

Before Death

  1. Review of Documents
  • Estate planning documents should be reviewed as soon as possible. That includes wills, revocable trusts, powers of attorney, health care proxies, and living wills (also called “revocable” trusts).  Circumstances often change before getting around to reviewing or addressing documents, and by then, opportunities could be lost.
  • Some of these legal instruments, such as health care proxies, empower an agent to act on behalf of the person who created the power. Without an advance directive, state law may decide who gets to make critical health care decisions.
  • The legal requirements to execute certain legal documents vary from state to state. Where notarizations are required, as is often the case with trusts, some states, such as New York, currently allow as an emergency measure electronic notarizations.
  • The 2019 SECURE ACT limits the ability of certain beneficiaries to “stretch” their inherited IRAs over their lifetimes. Beneficiary designations should be reviewed to determine whether pay out under the new rules makes sense.
  • Life insurance plans should be reviewed for cost, adequate coverage, and beneficiary designations.
  • For all designations (trustee, beneficiary, powers, etc.) consider adding more alternates.
  • Since many court systems are closed except for certain matters, delay in probate could present liquidity issues to families left behind. If a living trust has not been created or funded, consider doing it now.

After Death

  1. Alternate Valuation Date

Usually the fair market value on the date of death is used to determine the value of a decedent’s gross estate.  An executor can make an election to value an estate six months after death (or as of the date of disposition, if disposed of sooner).  For some executors, this election may be useful since the value of assets may have declined in that period.

  1. Disclaimers

An individual can disclaim all or part of an inheritance within nine months of the death of a decedent.  Depending on the terms of the will and state law, a disclaimer may allow the property to pass to another generation gift tax free.

Gift Tax Planning

  1. Current Gifting of Stock (publicly traded or closely held)
  • Making gifts currently should be considered, especially if the gift-giver believes the current economic downturn is temporary. Those who wait until the end of the year to make annual exclusion gifts of shares of stock may be doing so at a higher value, resulting in less shares going to the intended recipient.
  • The current downturn may offer the opportunity to gift interests in the family business to the next generation. Depending on the circumstances, these gifts can pass wealth to the next generation and utilize valuation discounts to reduce the value of the gift for gift tax purposes. This gifting plan also offers a pathway to discounting the value of the remaining shares in the hands of the older generation, which could lower the estate tax impact upon death.
  1. Large Gifts
  • Large gifts might offer the opportunity to take advantage of all or part of the approximately $11.58 million lifetime estate and gift tax exemption before it expires or is legislatively changed to help pay for part of the recovery package. The same may be true of the generation skipping tax (GST) exemption, which is currently the same as the lifetime exemption for federal estate and gift taxes.
  • Consider the state tax implications of large gifts. As one example, the way NYS calculates its estate tax may make these gifts especially beneficial, even though the New York State exemption is lower than the Federal exemption. New York does not have a gift tax.  Unlike the federal calculation, gifts made more than three years prior to death will not be added back to a decedent’s New York estate.
  1. Grantor Retained Annuity Trusts
  • A grantor retained annuity trust (“GRAT”) may offer an opportunity to pass wealth to another at the end of the GRAT period without the imposition of a gift tax or the use of the grantor’s annual exclusion or lifetime exemption. GRATs are best used with easily valued assets. The low interest rate environment and potential for increased appreciation in securities make this technique attractive.
  • For GRATs that are already in existence and “underwater”, consider swapping out existing GRAT assets for cash (if the trust instrument allows) and then “re-GRAT” those assets to a different trust.
  1. Gifts to Non-Citizen Spouses

Citizen spouses may want to consider using some of their lifetime estate and gift tax exemption to transfer temporarily depressed assets outright to a non-citizen spouse.  Lifetime transfers enable the non-citizen spouse to acquire those assets outright rather from a decedent spouse through a QDOT (Qualified Domestic Trust).  Should a US citizen decedent have left property outright to the non-citizen spouse, the non-citizen spouse, if appropriate, could still set up a QDOT after the death of the US citizen spouse.

  1. Charitable Trusts

If charitably inclined, charitable lead trusts (CLT) may be favored over other kinds of “split interest” trusts (trusts that benefit both charitable and non-charitable beneficiaries).  Historically low interest rates combined with depressed asset values offer an opportunity to benefit charitable and non-charitable beneficiaries and reduce the impact of gift taxes.

Education Planning – 529 Plans

Many 529 Plans are “upside down”; meaning these plans were purchased when stocks were high and now show a significant decrease in value.  While stocks are depressed, families may want to consider starting a new 529.  Future growth will pass tax-free for qualified higher education expenses.  The existing plan can stay in place and grow tax-free until it reaches its principal value (the amount contributed).  Then the purchaser can liquidate the plan with no negative tax consequences.

Business Planning

  1. Domestic Asset Protection Trusts

As one considers loans to restart one’s business or one’s life, early consideration should be given to domestic asset protection trusts (DAPT).  If the trust instrument allows for loans to the settlor, that may be a preferred way of getting cash into the settlor’s hands without making distributions outright, which could expose those funds to creditors.

  1. Sale of Business Interest to Intentionally Defective Grantor Trust (IDGT)
  • With a gift of at least ten per cent of the purchase price, an older generation could sell an interest in a business to the next generation in exchange for a promissory note, with the purchaser using the cash flow from the business to pay off the debt.
  • While circumstances my differ, payment by the grantor of income taxes on income from the purchased partnership or Sub S-stock is in effect a tax-free gift.
  • If the stock or the partnership interest were purchased outright, the purchaser would use after-tax dollars to complete the purchase. In an IDGT situation, the purchaser can use the cash flow from the business to pay the installment obligation with the grantor paying the taxes on the partnership income earned. More dollars go the purchase price enabling, all things being equal, for the purchase to be completed that much sooner.
  • Timing this transaction when the value of the business is still low, but with high prospects of sustained cash flow to owners, will enhance the chances of success of this technique.

Intra-family Loans

  • In most circumstances the Internal Revenue Code requires that loans charge some minimum amount of interest. Loans with a stated interest rate in excess of the Applicable Federal Rate (AFR) carry no gift tax consequences to the parties. A loan to a relative may give that person access to funds at rates and amounts that they would not otherwise qualify for or receive timely from a bank.
  • Intra-family loans might also help offset the pain of “paper” losses and support relatives who might otherwise have to sell prematurely.
  • For intrafamily loans that are currently in place, consider refinancing them.

Retirement Planning

  1. Conversion from a Traditional IRA to a Roth IRA

If an individual is in a lower tax bracket because their income is down substantially, they may want to consider converting a Traditional IRA to a Roth.  The distribution will be taxable, but perhaps at rates lower than the owner may see again.  The cost of recognition may be offset by the potential for tax-deferred growth within the plan without required minimum distributions.

  1. Suspension of Required Minimum Distributions for 2020

Under the CARES Act, Required Minimum Distributions (RMDs) are suspended for 2020.  For distributions that have already occurred, it may be possible to roll them back, if it has been less than 60 days since the distribution.

Income Tax Planning

  1. Loss harvesting

Consider realizing losses to offset capital gains.

  1. Compliance Deadlines
  • The federal income tax filing due date has been automatically extended to July 15 for many types of tax returns and schedules including individuals, corporations, trusts, estates, and tax-exempts.
  • The extension rules for each state should also consulted, as they may differ from the federal.
  • Note that some tax returns and information tax forms cannot be e-filed (i.e. estate tax returns, gift tax returns, Form 3520, to name a few). In some circumstances, the IRS does not support e-signatures.  Therefore, care must be taken to verify what will qualify as a “signed” tax return.

Now more than ever, we want to live our credo, “Your World. Worth More.”  If we haven’t reached out to you yet, please email or call us for personalized assistance.