When it comes to estate planning, many tend to defer decisions. Often a plan is generally in place, but when it comes to actually executing the plan, the documents remain in draft form, even as wealth advisors and legal counsel encourage their clients to act. For those who failed to act in 2018 and 2019, procrastination has been rewarded with a unique opportunity to maximize the effectiveness of estate planning techniques. In fact, there are at least four reasons why now is the right time to be executing your estate plan.
First and most obviously, with a few notable exceptions, the COVID-19 crisis has dramatically pushed down asset values across a broad range of assets. Between February 21st and March 27th, publicly traded equities declined by almost 24 percent as measured by the S&P 500, with many industries experiencing even greater declines. Energy prices during that same period also fell sharply with West Texas Intermediate crude falling to nearly $20 per barrel while demand shocks were exacerbated by a failure of key energy producers, Saudi Arabia and Russia, to agree to limit production (in fact, these producers are planning on increasing production). Real estate is also under pressure as investors become concerned that many tenants will be unable to pay rent in the coming months. The S&P REIT index, for example, declined by approximately 30 percent since the downturn began. Even fixed income investments such as corporate and municipal bonds have experienced sharp declines as investors have become concerned about credit quality during the economic uncertainty. These reduced valuations allow for more assets to be transferred to younger generations without triggering taxing thresholds (or minimizing taxes if they are triggered). When coupled with estate planning tools such as grantor retained annuity trusts (GRATs), or family limited partnerships, the benefits can be enhanced further.
Second, the uncertainty in the current environment provides a basis for supporting greater discounts for lack of control and marketability. These discounts, which may be applied to non-controlling equity interests in both asset holding entities and operating businesses, tend to increase in times of greater uncertainty. Thus, for those who wish to gift or sell non-controlling business interests, such as limited partnership interests, or minority interests in operating businesses, these larger discounts can be applied to already lower asset values.
Aside from the economic uncertainty associated with the COVID-19 crisis, there is also political uncertainty. The U.S. general election is less than 8 months away and a change in administrations or the composition in Congress could result in political leaders revisiting previously debated topics such as the possibility of limiting or eliminating valuation discounts, revising the lifetime exemption downward, or adjusting marginal estate tax rates upward. Furthermore, even if no new legislation is passed, if a new administration is elected, additional enforcement resources may be deployed to the IRS.
Finally, even if there are no major political changes, the vast sums of stimulus money through relief and recovery bills that have recently been signed into law could increase the federal debt and deficit to unsustainable levels which would force political leaders to find avenues for revenue generation regardless of their political affiliation. Some change to tax law, enforcement, or a combination of both is a foreseeable consequence.
The significant disruption caused by the COVID-19 crisis has resulted in reduced asset values and potentially more favorable discounts when conducting estate planning transactions. Additionally, the potential for changes in the tax laws and/or more aggressive enforcement means that right now may be the most favorable environment for estate planning that we may see for some time to come. For those who have been waiting to put an estate plan in motion, now may be the right time to take action.
