The economic uncertainty that has accompanied the COVID-19 pandemic has depressed values of public and private companies alike. But uncertain times also create planning opportunities. For private business owners, company survival is understandably top priority, but if your business is positioned to weather the storm, now could be a good time to consider certain estate and exit-planning strategies that benefit from lower enterprise valuations.
Gifting. If your estate plan includes gifting ownership, you might consider accelerating those gifts in the short-term to take advantage of depressed value. Lower values mean you’ll use less of your lifetime gift exclusion, or that your exclusion will cover a larger percentage of the gifts than it would have just months ago—or months from now if value rebounds.
GRAT. You might consider leveraging Grantor Retained Annuity Trusts (“GRAT”) or other trust strategies that transfer portions of company ownership out of your estate, which will leave any rebound in value and subsequent growth also outside your estate. The current low interest rate climate complements the GRAT strategy as it lowers the yield on the annuity payments that the grantor takes back from the trust.
Taxable or non-taxable estate planning. If you are administering a taxable estate, you could benefit from the alternate valuation date—six months after the date of death—which allows your business appraiser to account for the effects of COVID-19 in the appraisal. On the other hand, if the estate is not taxable and the death occurred during the pandemic, it may be wise to use the alternate valuation date in anticipation of a rebound in value, which would allow you to take advantage of the additional basis step-up.
Estate planning and your exit strategy might not be your most pressing issues in the coming days or weeks, but the depressed valuations resulting from the COVID-19 turmoil do present opportunities for planning that would be wise to consider. Having these discussions with your estate planning advisors now could prove immensely beneficial in the long run.