“Behind every dark cloud there is a silver lining.”

During this terrible time of the COVID-19, which has permeated every aspect of our lives, our community, and the world at large, we find there are actually many positive consequences.  Last month, I observed how we have rediscovered ourselves, our kids, spouses, families, and friends, and vice versa.  We are using the technology that formally isolated and divided us to keep us connected.  We have seen how resilient, creative, and caring we all are.  These things can be viewed as the silver lining.

Estate Planning

In the legal area, as well, there have been unexpected silver linings.  The low interest rates are driving a surprisingly robust real estate market. And negatives such as the stalled economy, volatile stock market, record unemployment, and lowered asset valuations, coupled with the highest estate and gift tax exemptions in history, have created  a unique but short-term window of opportunity for estate planning, asset protection, and tax shelters.   Most people feel that these things are not relevant to them. Rather, they are significant  only for very high net worth individuals. This is a common misconception. Estate planning includes preparing the basic documents, such as wills, powers of attorney, and living wills/health care directives. Estate planning takes into consideration each family’s unique circumstances and goals.  Take, for example, if there has been a second marriage, a divorce, or a loved one with special needs. Estate planning also must consider if there is Medicaid eligibility, business succession planning to plan for, etc.  It is important to note that  properly prepared estate plan can minimize or even eliminate estate taxes.

In “normal” times, common estate planning tools include gifting and creating trusts. Again, do not be intimidated by the idea of a “trust.”   A trust is simply a legal entity that holds assets for the benefit of others.  Irrevocable trusts are generally drafted to make the assets immune to estate tax and, when applicable, to creditors.  And unlike a straight gift, the trust terms dictate how and when the assets are distributed to the beneficiaries.

In order to understand why now is the perfect time to create, review, amend or enhance your current estate plan, you need to be aware of the following:

Gift and Estate Tax Exemptions

Gifts are transfers to either individuals or trusts and the gift giver is the one who is taxed, never the person (or trust) that receives the gift.   At present, the federal gift tax exemption is likely the highest it may ever be – currently $11.98 million per individual. This means that a married couple can make lifetime gift totaling $23.16 million (combined) without incurring any federal gift tax.

The federal estate tax exemption is the same as the federal gift tax:  $11.98 million per individual ($23.16 combined for married couples). Lifetime gifts are subtracted from this amount to calculate a person’s estate tax exemption.  This exemption amount is expected to be lowered significantly after the November elections (no matter who wins) to recoup the billions of dollars being spent for COVID relief, which will leave many estates suddenly subject to an estate tax. This will occur as well on the state level, so it is very likely that our estates will soon be subject to either federal or state estate tax, or both.

It is important to note that New York State has an estate tax exemption of just $5,080,000.00 ($10,160,000.00 for couples). Right now, if the exemptions were to be lowered, many NY estates would be subject to NY estate tax..

Decrease in Valuation of Assets Is to Your Advantage

The valuation of the assets gifted or transferred to trusts is crucial in determining the amount of exemption used; the lower the better. Given the current state of the economy, the valuation of most assets is way down. Appraisers note that they are seeing valuations reduced by up to 50% for real estate.

And valuation discounts are increasing due to higher risk amid the current historic uncertainty. Valuation discounts are used together with appraisals to value commercial properties and  business interests.  Higher discounts further lower the asset value for gift and estate tax purposes.

Now is the time to take advantage of the high estate and gift tax exemptions, depressed asset values, and increased valuation discounts to create the perfect estate plan.

* This information is not intended as legal advice and should not be used or relied upon as such.  It is provided for information purposes only.  Please consult your legal, financial, tax, or other professional advisor.

Lois D. Sutton is an attorney whose practice area includes residential and commercial real estate, estate planning, wills and trusts, including Halachic wills and Halachic Health Care Directive/Living Wills,  probate, and estate administration, and business matters.   Contact her at 732 245-4500 or at Lsutton@loissuttonlaw.com.