Estate Planning in a COVID-19 Economy

The COVID-19 emergency has forced both businesses and individuals to make difficult decisions. For businesses, it is all about maintaining positive cash flow and reducing expenses until market conditions return to “normal”. For Atlanta individuals, it is about making sure they have enough to manage through these uncertain times. While the focus may be on the short term right now, it is important not to forget about the long game, including estate planning. A positive cash flow has been linked to financial security, but in times of crisis, this is especially true. Access to cash, when needed, is important now, but it will also be necessary when retirement draws near. The changes implemented by the Coronavirus Aid, Relief, and Economic Security (CARES) Act creates many opportunities for taxpayers. Effective estate planning means analyzing all opportunities available to help accomplish planning objectives. To help clients, prospects, and others, Wilson Lewis has provided a summary of each opportunity and potential impact below.

Fast Cash Now

When taxpayers need cash now to compensate for job losses, healthcare costs, or business disruptions, the CARES Act allows individuals to turn to their retirement accounts. First, the Act delays the 2019 IRA contribution deadline to July 15, 2020. This three-month delay gives individuals flexibility when they may need cash upfront for non-retirement needs. It also waives the 10% early withdrawal penalty when individuals pull up to $100,000 from their retirement accounts before they are of retirement age. To qualify for the penalty abatement, taxpayers must attest that their withdrawal is for COVID-19-related purposes. They must also pay back the distribution within three years if they want to avoid paying income taxes on the withdrawal.

Retirement Plan Flexibility

Most taxpayers are required to withdraw certain amounts from their retirement accounts each year, but in 2020, taxpayers do not need to do this. Required minimum distributions (RMDs) are suspended for the 2020 calendar year, and taxpayers can even roll back distributions previously taken if it has been less than 60 days since the distribution. Though this does not help taxpayers with an immediate need, it can help those who want to optimize retirement savings. If retirees are required to pull from their accounts when the market is at a low point, they may be selling their financial assets at a loss, weakening account values, and reducing the amount left to pass on.

Estate Valuation Date

Executors of estates for individuals who have recently passed may benefit from electing the alternate valuation method. When making this election, any assets that remain in the decedent’s estate will be valued six months after their death rather than on the day they died. Valuing assets when the market is in a slump can be beneficial if estate taxes are a concern.

If the estate is valued at less than $11.58 million, estate taxes will not be assessed and electing the alternate valuation method could actually generate negative consequences. When beneficiaries receive inherited assets, the cost basis in the assets are “stepped up” to the values determined by the estate. If the executor made the alternate valuation election and valued the assets at a time when the market was at a low point, beneficiaries will adopt those low numbers as their assets’ cost bases. When the beneficiary sells those inherited assets, they will owe capital gains on asset appreciation related to the market’s recovery. In effect, this converts estate taxes for the decedent into capital gains taxes for the beneficiary.

Neither option is inherently the better choice, so when estates are nearing the $11.58 million lifetime exclusion, taxpayers should run the numbers. With the help from an advisor, they can determine if the election will serve them and their beneficiaries.

Transferring Closely Held Corporate Interests

Gift taxes and estate taxes work hand in hand. In fact, they share the same $11.58 million lifetime exclusion. A taxpayer’s gifts valued above the $15,000 annual “freebie” limit will eat away at this $11.58 million exclusion, and the amount that remains will be applied to the estate. Fortunately, when the markets are sagging, this $15,000 annual gift tax exclusion will have an even stronger impact.

For the same $15,000, small business owners can transfer more of their business interests to family members without incurring a tax bill or depleting their lifetime exclusion. In other words, a depressed market can actually be beneficial for owners of closely held businesses if their goals are to transfer their interests onto the next generation. The transfer taxes are only part of the equation since the business interests represent future income tax responsibilities for the recipient, so it’s important to understand the full impact of the decision.

Contact Us

Estate planning is important in any and all market scenarios. When the market trends down, taxpayers may need to adjust their short-term plans to compensate, but plans should never be abandoned. For this reason, it is essential to consult with a qualified tax advisor to guide efforts. If you want to know how the coronavirus will affect your estate plan or if you need to create one, Wilson Lewis can help. For additional information call us at 770-476-1004 or click here to contact us. We look forward to speaking with you soon.