2020 Estate Planning and Tax Considerations: COVID-19

The impacts of COVID-19 continue to reverberate, and businesses adversely affected by those impacts can expect to struggle, operationally and financially, for months, if not years, to come. Estate planning becomes ever more crucial as lost current and future earnings translate into decreased valuations. From a tax perspective—including changes presented by the Tax Cuts and Jobs Act (TCJA)—there are opportunities to assist your clients for the 2020 tax year, but planning is needed, and the time to act is now.

The TCJA temporarily increased the basic exclusion amount (BEA) from $5 million to $10 million for tax years 2018 through 2025, adjusted for inflation. For 2020, the inflation-adjusted BEA is $11,580,000. In 2026, the BEA will revert to the 2017 level of $5 million, adjusted for inflation. The final regulations also contain a special rule that allows an estate to compute its estate tax credit using the higher BEA amount applicable to gifts made during life or the BEA applicable on the date of death. This rule was enacted to alleviate concerns about gifts made in 2018 through 2025 and exempted by the higher BEA later becoming taxable.

The combined effects of COVID-19 on valuations and the TCJA changes to the estate tax—a “perfect storm”—create a unique opportunity for estate planning that warrants serious consideration. Attorneys should speak with their clients to learn how or whether COVID-19 has affected them from a personal, business, real estate, or investment perspective. A client whose assets have been negatively affected should be advised to speak with a qualified real estate appraiser, business appraiser, CPA, or other relevant professional about their specific situation. Those conversations will provide a basis from which to determine whether that client’s situation warrants action by year-end. This is a unique opportunity to move wealth more favorably from potentially lower asset valuations, combined with the TCJA changes to the BEA, making the overall strategy more efficient.

This concept also applies to other business decisions that clients may be facing and may have postponed due to the tax consequences; these may include conversion to an S corporation, distributions of real or intangible property from a corporation, or a liquidation.  This year is an ideal time to revisit these situations and determine whether 2020 is the year to revise plans.

Attorneys should remain proactive, meeting soon with clients to discuss these matters and not postponing discussions. Qualified professionals can help an attorney navigate the impact of COVID-19 on a client’s assets, and clients who take advantage of this opportunity can benefit greatly in the near-term and the long run.

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