Lemons to Lemonade and Virus to Value: A Unique Window for Gifts to Family

The federal transfer tax consequences of a gift are determined by the gift’s value when it changes hands. So if you want to advance wealth, the time to do so is when values are low and there is a reasonable expectation they will recover. A gift at that time produces a bigger bang per tax buck.

That time is “now,” and among the results of the COVID-19 pandemic. Cash is dear and the capital markets are fractured. Values are depressed and with them, the tax consequences of gifts. The concepts apply to gifts of many assets, including marketable stocks, bonds and mutual funds.

In particular, transfers of business interests present strong opportunity. The pandemic supports a reduction in the value of nearly every sort of business as revenues have plummeted, capital is difficult to raise, and capitalization rates are lower than they were pre-pandemic. Gifts of minority interests in a business continue to benefit from discounts for illiquidity and unmarketability that reflect their holders’ powerlessness to turn paper into cash at will. Substantial equity in a business can be transferred in this manner without giving up control!

Substantial tax savings are available to your family even if your prior gifts have exhausted the federal gift tax lifetime exclusion! Your family can benefit from the sale of undervalued assets within the family in exchange for deferred payment. Interest rates, known as “AFRs” or “applicable federal rates,” that must be recognized in such transactions remain historically low even where payment is deferred over many years. You may avoid realizing capital gain for federal income tax purposes if you sell such assets to an “intentionally defective grantor trust” you establish before selling the asset. That trust can be designed to benefit several generations.

Annual exclusion gifts, of as much as $15,000 per donor, per recipient, per calendar year, benefit from the same concept. More shares of a stock now worth $50 per share can fit into an exclusion of $15,000 than shares of the same stock worth $80 per share in better times.

The decision to “gift now” anticipates a precipitous decline in the federal transfer tax exclusion after 2025 or sooner, if Congress looks to increased transfer taxes to help pay for COVID-19 economic stimuli.

For more information and to schedule time to discuss gifting opportunities, please contact C. Thomas WorkJay WagnerHeather Eshelman McCusker or the Stevens & Lee attorney with whom you regularly work.

©2020 Stevens & Lee, a Pennsylvania Professional Corporation. Richard J. Pinto, attorney responsible for the New Jersey office.

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