How COVID-19 Created A Valuable Tax Planning Opportunity

The Coronavirus’ widespread impact on the global economy has created a valuable tax planning opportunity for HNWIs.

Major stock markets around the globe are down.

Small and privately held businesses have experienced declining revenues and received very little assistance from the emergency economic packages passed by governments. Many are fighting just to stay alive.

Economic turmoil changes the equation for everyone. Even HNWIs are more conservative with their money when times are tough.

The record prices fetched by high-end real estate, art, and other collectables during the boom of the past few years are unlikely to be topped in the near future. Rather, many assets are likely to see falling prices.

Real estate prices have dipped and could easily drop further.

Investment losses are forcing owners of fine art and other collectibles to become sellers.

But economic recessions (and potentially depressions) bring unique transfer tax (e.g. gift and estate tax) planning opportunities.

For example, starting in 2020, the lifetime gift tax exemption amount in the US is $11.58 million per person ($23.16 million for married couples).

A net worth of $2 million or more is one of many factors used to determine if someone giving up their US citizenship is a covered expatriate and therefore subject to the so-called “exit tax.”

Naturally, the same principle applies to transfer thresholds in other countries. 

Here’s How To Capitalize 

Suppose a portfolio that was worth $18 million at the end of 2019 is now worth $14 million.

Alone, the reduced asset prices allow for its owner to transfer an “additional” $4 million dollars to his heirs assuming that prices rebound. 

But powerful devaluation strategies such as restrictions on voting rights, lock-up periods, and dictated methods of sale for shares of privately held companies can assist taxpayers further still. Strategically using minority interests and family run entities is a great way to reduce the value of assets due to the lack of marketability. 

These strategies are only enhanced by the uncertainty caused by an unstable economy. It wouldn’t be surprising for a $14 million portfolio to be discounted 60 to 80%.

The fallout from the Coronavirus has created a rare advantageous window to transfer assets or expatriate. 

Transferring assets to an entity often triggers a gain recognition. Depreciated asset prices means the associated tax bill will be lower – or, even a loss.

For years, one of my clients had been wanting to redomicile a significant portion of his wealth but declined because the taxes were punitive. We’re not in the process of redomiciling because he’ll incur a tax loss that can be used to offset future gains. 

Moreover, any appreciation that occurs after a completed transfer or expatriation is tax-free with respect to the lifetime gift tax exclusions, the exit tax, and similar transfer limitations. Potentially, some of the devaluation-causing restrictions placed on shares of privately held companies can be unwound.

With proper planning, it’s possible to transfer or retain (in the case of expatriation) significantly more than the relevant threshold.

Time Sensitive

The devaluation strategies linked to and discussed above will be available for the foreseeable future.

But the reduced asset prices we’ve seen in the past few weeks can change quickly. Some transfer opportunities can evaporate in a matter of weeks. 

There’s no need to rush into a decision but time is a factor that must be considered. 

 If you’d like to discuss your particular situation, you can contact us here.

Apply here for more information on Jimmy and his services.

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