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As Bob Dylan put it, The Times They are a-Changin’

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Dylan’s iconic song was an anthem for social and political change, a call for people to realize change will happen, no matter what. More than 45 years later, the lyrics are still relevant, especially in the estate and gift tax universe. That means individuals and business owners must be sure to update their estate planning arrangements to take advantage of current conditions. There have been a number of important developments that should be considered to design an estate or gifting plan that best suits individual needs.

With the passage of the Tax Cuts and Jobs Act of 2017, estate, gift and generation skipping tax exemptions increased significantly. As of 2020, the individual estate tax exemption stood at $11,580,000, and the annual gift tax exclusion for 2020 is $15,000 per person, the same as in 2019.  Under current tax law, the higher estate and gift tax exemptions will sunset on December 31, 2025, with the exemption for 2026 returning to $5.49 million indexed for inflation.  With inflation, this would result in an exemption somewhere between $6 million and $7 million.

However, there are two major events in 2020 that could impact business valuations to be filed with estate and gift tax returns to the IRS.  The first being an almost complete shutdown of the economy due to the COVID-19 pandemic, with the resultant impact on the economy and loss of tax revenue (1st quarter GDP declined by 4.8% and unemployment was close to 15%).  In response, Congress passed several relief bills: the $8.3 billion Coronavirus Preparedness and Response Supplemental Appropriations Act; the $192 billion Families First Coronavirus Response Act; the $2.2 trillion Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”); and the $483 billion Paycheck Protection Program and Health Care Enhancement Act.  Together, the three stimulus bills totaled almost $2.7 trillion and represented about 12.5% of GDP.

The second major impact is the upcoming November election.  In addition to the presidential election, 435 House seats and 35 Senate seats are up for grabs.  Congress could look very different in January 2021.  The current makeup of the Senate is 53 Republican, 45 Democrat and 2 independent.  BallotPedia rates 17 Senate races as battlegrounds, with 12 held by Republican incumbents and 5 by Democratic incumbents.  The makeup of the House is 196 Republican and 233 Democrat, with 1 Libertarian, and 5 vacancies.  BallotPedia rates 72 House races as battlegrounds, with 30 held by Republican incumbents, 40 Democratic incumbents, and 2 vacancies.

The stimulus package will drive federal deficits and borrowing to much higher levels.  A Democratic win of the presidency or the Senate could also lead to a change in the tax code regarding estate and gift tax rates and exemptions.  But, even if political transition does not result in tax code changes, rates are scheduled to revert to pre-2018 levels in 2026.  Furthermore, you may be able to take advantage of the stock market retraction to lower the value of market comparables of your businesses and, if appropriate, lower projected revenues and earnings due to the Covid-19 pandemic.

Now might be the time for an update to estate and gift plans to take advantage of the higher exemptions and possibly lower business values.  If you are the owner of a closely-held business, a valuation of your interest needs to be prepared as part of the planning process.  A properly prepared appraisal report considers all of the relevant factors that go into determining value, including assets, liabilities, income and cash flow. Sobel EAC Valuations has experienced valuation experts who can assist you by completing an analysis in compliance with all IRS regulations. 

Frank Merenda, Sobel EAC Valuations