Estate Planning and Business Transition Issues Not to Overlook Before Year-End
As we enter the final quarter of 2021, there are many things still to do and plan for before the end of the year. There are also some timing considerations given proposed legislative changes and the lead time needed to accomplish some of these items. You should be reviewing your year-end estate planning or business transition concerns NOW. There are several things to contemplate and review, such as year-end gift giving, valuations, and tax considerations, including issues specific to those who took out Paycheck Protection Program (“PPP”) loans.
Below is a list of items we’ve identified that you might want to consider as you plan for the end of 2021 and future transitions. If you need additional assistance with year-end gift or charitable giving, estate planning, income tax, or other gifting opportunities and valuation issues and would like to engage with an attorney, we encourage you to reach out to Schwabe’s Tax and Estate Planning professionals today. Additionally, our Privately Held Businesses & Enterprise team is available to assist with business transition concerns.
Year-End Gift Giving
Year-End Charitable Giving
Year-End Planning For Income Tax Issues
Paycheck Protection Program (“PPP”) Loans and Year-End Planning
Business Transition Planning
Federal gift tax exemptions are at an all-time high. These are use-it-or-lose-it types of exemptions and have year-end implications. Now is also the time to take advantage of the currently available valuation discounts available to closely held business interests and valuation opportunities from the COVID-19 pandemic (see below for more valuation information). Assets to consider for 2021 gifting include:
- Marketable securities
- Business interests: includes outright gifting and using family businesses and other entities to remove future appreciation from taxable estates. These entities currently qualify for valuation discounts which provide some great opportunities to leverage the use of your estate and gift tax exemption. Those valuation discounts could be at risk if certain tax changes occur, see OP-ED: Potential Tax Changes May Increase Cost of Passing Family Businesses).
- Charitable gifts: see below for additional charitable allowances under the CARES Act
- Appreciated long-term capital assets
Keep in mind—it takes time to analyze, consider, and plan for lifetime gifts, especially large lifetime gifts, so the sooner you start the process of planning for gifts, the better. For more on creating a legacy through lifetime gifting, see Capital Press Commentary: Creating a Legacy Through Lifetime Gifting. Getting an early start is especially critical if you are contemplating gifts that must be made by year-end.
There are several considerations for year-end estate planning, including estate and gift tax planning rollbacks, potential tax reform, and whether your current estate plan needs a tune-up.
- Estate and Gift Tax Exemption Rollbacks: The current federal estate and gift tax exemption amount for 2021 is $11.7 million. This exemption is temporary and set to roll back to the prior federal law at the beginning of 2026. Once rolled back, the exemption amount will be $5 million adjusted for inflation—roughly one-half of the current amount. There are discussions in Congress about potentially accelerating this rollback as soon as January 1, 2022. This means that as of January 1, 2022, the federal estate and gift tax exemption could be cut in half.
- Tax Reform: Depending on how things unfold in Congress, we could see other significant changes to the federal estate and gift tax rules, so we recommend keeping your eye on these developments. Learn more about three recent tax reform proposals that may affect your estate planning. See Tax Reform: Three Estate Planning Proposals to Watch
- Consider Gifts: Given the potential changes, we encourage you to confer with your estate planning attorneys and other professional advisors to discuss whether a lifetime gift makes sense for your family. It is important to engage in these discussions sooner rather than later—you shouldn’t wait as the window for making large gifts may be closing!
- Check Your Plan: Year-end is always a good time to review your estate plan and consider whether it needs revisions. For more, see When to Tune Up Your Estate Plan and Four Critical Steps to Estate Planning During Uncertain Times. For business owners, this type of planning is especially critical to do. See Succession Planning vs. Estate Planning – Why They Are Both Important.
The 2020 Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) encourages additional charitable giving, and the charitable giving provisions were extended and some of the benefits expanded through the end of 2021 by the Consolidated Appropriations Act passed on December 27, 2020. It allows a $300 above-the-line deduction for cash charitable gifts for non-itemizing taxpayers, and increases the charitable deduction adjusted gross income percentage cap from 60% to 100% for certain contributions by taxpayers who itemize, and increases in the corporate deduction limit from 10% to 25%.
For more details on these opportunities see Extension of Charitable Giving Benefits under the CARES Act for 2021
Wondering how to get started? See Tips for Planning Charitable Giving.
Due to the uncertainty of tax situations in the future, before year-end, individuals and business owners should discuss, with their tax and estate planning professionals, the timing and effect of possible changes to:
- Individual income tax rates—state and federal
- Carry back losses
- Basis or cost
- C corporation losses
- Corporate income tax rates—state and federal
- 1031 Exchanges
- Capital gain rates
- Estate and gift tax exemption amounts
- Suspension of required minimum distributions for qualified retirement plan accounts
In general: Many estate and business succession planning tools require a valuation of a business or real property or other assets. The best valuations are done by independent third parties, and these take time. Please plan ahead: it might already be too late for 2021. There are many reasons for valuations: succession planning, estate planning, stock and option programs, partnership splits, refinancing, recapitalization, divorce, etc. There is inherent tension on the reasons for the valuation and the use of the valuation. For example, for estate and succession planning purposes, lower valuations are desired. However, for stock redemption and option programs, the valuations often need to be at fair market value. Please keep these items in mind when securing and using a valuation.
Gifting opportunities and valuation issues: The economic effects of COVID-19 have adversely affected many businesses, although many sectors have recovered or fared better than expected. For those that continue to experience adverse effects, there is potential opportunity to take advantage of depressed valuations to accelerate gifting for owners that plan on transferring ownership to the next generation. When making such gifts, the best practice is to work with an estate planner who can hire an independent third party to perform a valuation of the business. Such valuations take time.
When making such gifts, it is important to take a consistent position on the valuation of the business. In most situations, the owners of a business want to claim a high valuation. However, when making gifts, the owners often want to claim a low valuation to minimize their potential tax liability. This creates some risk when the owners are seeking a high valuation in certain situations and a low valuation for estate planning and gifting. Business owners should make sure their advisors are aware of any recent sales of equity in the business and the valuation used in such transactions. Furthermore, if a business has a buy-sell agreement, business owners should make sure that their advisors are aware of any provisions in such agreements that set a valuation, such as built in formulas. It might be difficult for a business to claim a lower valuation than the one implied by the buy-sell agreement.
If PPP loans were obtained and not forgiven, please be aware that there might be timing issues for year-end planning and tax issues and forgiveness. Those issues include:
- Any changes in ownership or change in structure might require prior approval from the lender and certain changes will require SBA approval or other requirements. Such approvals or requirements can take from two to eight weeks. Since they are loan requirements, they will affect forgiveness. Please talk to your lender prior to any change in ownership.
- The forgiveness process takes time—at least five months from the date the application is accepted, and likely longer if the loan is over $2 million.
- Open questions—there are many gray areas, but make sure to document your conclusions.
For additional details, please see Asking for Forgiveness: Further Revised PPP Loan Forgiveness Applications and Guidance (Updated 08/12/2021) and Consolidated Appropriations Act, 2021: Tax Update (1/7/2021)
As we emerge from the pandemic, there are a number of reasons to align business strategy with your transition and estate plan. In many sectors, buyers are seeking to position themselves in competitive industry landscapes with strategic acquisitions, creating opportunities for business owners seeking to sell. Private equity continues to amass large amounts of capital and often looks to invest in well-managed privately held companies where the owners seek some liquidity but desire to remain in the business. Succession plans involving key employees are attractive for many private companies, but increased employee turnover presents challenges to those that seek to retain top talent with ownership potential. Tax and economic uncertainty have accelerated many owners’ timescales for selling. Companies with a written transition plan are better prepared to seize attractive third-party opportunities that arise and are more likely to have successful internal transitions. For more details, please visit the Schwabe Privately Held Businesses & Enterprises page.
To help understand the full spectrum of proactive legal measures you can take for estate planning and business succession, we encourage you to reach out to Schwabe’s Tax and Estate Planning professionals or Privately Held Businesses & Enterprises team today.
This article summarizes aspects of the law; it does not constitute legal advice. For legal advice for your situation, you should contact an attorney.
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