Careful planning can help mitigate the impact of economic difficulties. A transfer from a holding entity to a family member or trust may minimize some of the pain of a down market.

Wealth transfer

Estate Planning Options During COVID-19

  • Bethany Hearn
  • Tim Muehler
  • 5/15/2020

Key Insights

  • Contributing assets into a limited liability corporation, partnership, or other holding entity and then transferring interests in those entities to family or a trust may be an efficient way to pass wealth to the next generation.
  • With today’s lower asset values, moving assets out of your estate will likely use less of your lifetime exemption.
  • Real estate values may also be declining, although at a slower rate than values in the stock market. Monitor those asset values for possible gift and estate tax savings opportunities.

COVID-19 has brought unprecedented challenges in our personal, financial, and business lives. However, with lower stock values and expected declines in real estate values, you may be able to strengthen your estate plans and preserve more wealth for you and your family.

Consider the following planning opportunities. They may put you in a
better financial position as we emerge from the coronavirus crisis.

Strategic planning could help preserve more wealth for you and your family.

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Use holding entities to capture the “benefit” of down markets

It is very common to contribute assets into a limited liability company, a partnership, or another holding entity and then gift or transfer minority interests in those entities to
a trust or the next generation.

Under current laws and IRS regulations, the value of transfers of minority interests in an LLC/LLP, etc. are eligible for a discount for a lack of control and a discount for lack of marketability (DLOM) from the pro-rata value. Depending on a number of factors, including the nature of the assets held and the terms of the entity agreement, the effective combined discounts can be as high as 35%. If the asset values within the holding entity are depressed from a stock market decline or drop in real estate values, you can transfer interests in the holding entity at even lower values than before the drop in value. In the example below, the combined discounts represent a 32% discount from the pre-market decline value. The value saved from the discounts and an assumed market decline of 30% results in an effective discount of 52% from the undiscounted value before the market drop!

[Click to enlarge image]

Marketable security holding companies

As we all know, the stock market dropped more than 35% off its recent all-time high. This drop in value is shocking, but it creates a real opportunity to move assets out of your estate at much lower values than just a few months ago, utilizing less of your lifetime exemption. A gift is valued as of the date of the gift, so even if the stocks move up dramatically after the gift is made, the “savings” from the recent decline in value is locked in.

Real estate holding companies

While the drop in stock values is easily quantified, the potential drop in real estate values resulting from the global pandemic is not as obvious or measurable. There is a sense in the industry that real estate values will drop, although at a slower rate than the stock market. While many believe values will be harmed, some feel this impact will be only temporary. This uncertainty itself has a negative impact on the value of interests in real estate holding entities.

Although the impact on real estate cannot be quantified as easily as with marketable securities holding entities, we believe the current and short-term economic conditions will compress real estate values and the values of those entities that own real estate.

How we can help

CLA can walk you through the strategic planning opportunities outlined in this article to see if there is an opportunity to mitigate the financial impact of the market adjustment for you and your family.

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