Webinar: US estate planning in the post-election & corona age. Opportunities & Considerations
Thursday December 17, 2020
This webinar will discuss the impact of the US elections and the corona virus on estate planning for US citizens living outside the US (see details below). The webinar is intended for US citizens and their tax and financial professionals. The webinar will seek to highlite solutions that can be implemented before year end and afterwards.
A. Asia/Europe –Japan/Seoul 7pm, Perth/Beijing 6pm, 12pm Israel, France/Germany 11 am, London 10 am
B. Americans/Europe - 9am California, 12pm NY, 5pm London, 6pm France/Germany, 7pm Israel
Background to the Webinar
It is said that the only two certainties in life are death and taxes. If so, what about the US estate tax for US citizens who own assets of at least $5.5M individually, or $10,000,000 jointly?
While we live with uncertainty, the corona virus and US elections have increased the level of uncertainty regarding estate tax in two areas (i) asset valuations and (ii) the estate and gift tax exemption.
The importance of valuation in estate planning is clear. The estate tax is imposed on the fair market value (FMV) of the estate at death. On the other hand, for gift tax purposes, the FMV of a gift is valued when the gift is made. How does one determine the FMV on such date? The test is objective: what a "arms-length" unrelated buyer would be willing to pay a seller” for the asset sold.
A few core considerations apply to gifting:
How to valuate an asset being transferred. The FMV of a publicly traded stock is easy to determine. The value of real estate – less so. And the value of shares in a closely held business – far far less so. As to such shares, various factors play a crucial factor in determining their FMV, such as whether the shares gifted convey control in the company, or are minority shares. A buyer will be willing to pay much more for shares of a private company that confer control, and much less to for a passive minority interest. Yet when a gift is made, the value is determined by the objective “third-party” test, without regard to the fact that the gift recipient is actually a family member. And conceptually, the same logic applies even when 100% of the shares are gifted to children of the same parent/s. For example, when parents gift to three children each 33% of the shares in the company, is the minority discount applied? Whether the children may or may not have “effective” control is not the test. The test is what a neutral third party would pay a child for its 33% interest. Additional discounts may apply, such as for non-marketability of the shares. For example, a buyer of a minority interest in a company will pay more if that buyer can sell the shares in the future to a third party without restriction. Yet if the shares are not transferrable or subject to restrictions on transfer? Properly structured, a share in the hands of the controlling shareholder can have a FMV of 100, while the FMV of a minority interest for gift tax purposes is drastically less. And in the age of corona, the financial situation of many companies have deteriorated, and their future prospects remain uncertain. Is there not a corona-discount? Clearly, there is room for significant flexibility.
The future estate and gift tax exemption. The current exemption is $11.5M and it falls back to $5.5M in 2025. However, what happens if the new US democratic administration and Congress reduce the current exemption before that? Can the change apply retroactively? Or in other words, what happens if I give away $11.5M today and the exemption falls to $5.5< tomorrow? Is a retroactive gift tax applied to a gift constitutional? A 2020 Federal court decision upheld the retroactivity of a tax what went back 30 years. Treasury, however, has appeared to take a more lenient position when it comes to retroactive gift tax.
All things being equal, to minimize estate tax, it is a good idea to consider gifting away shares in privately held companies which are (i) undervalued due to corona and/or (ii) expected to appreciate substantially in the future. Of course, not “all things are equal” as lawyers say. There are countless other factors – age, control and local/non-US tax - to name just a few. However, for US citizens for whom Estate tax is an issue, the current environment does offer opportunities.