How Volatile Markets, Fears of COVID-19 Contagion, and Global Uncertainty Have Conspired to Present an Incredible Planning Opportunity

At the risk of sounding tone-deaf, 2020 is turning into one of the most historic “perfect storms” in the realm of income and estate tax planning – specifically for business owners and owners of illiquid assets.Surely, what is unfolding around COVID-19 is both troubling and fear-inducing, specifically for those most vulnerable to the illness. No planner would ever wish for these circumstances – and our team continues to implement proactive protocols to do our part in both hedging against unnecessary risks of spreading the virus – as well as supporting clients and the community in their efforts to do the same. 

We would never suggest we are in the best of times; in fact, every partners’ meeting combines our “leadership through experience” philosophy about the critical role of a steady hand in volatile markets – with our concern for client’s companies who have seen dramatic reductions in revenue. Still, amidst all of the media doomsday predictions, I think it’s important to point to the silver lining – and candidly, perfect storm – that business owners should not only be glimpsing at over the horizon – but proactively taking full advantage of. 

Allow me to set the stage.

Estate planning, at its basest form, is the process of gifting, selling or transferring interests out of a grantor’s name – preferably at discounted value, into a trust or other vehicle designed to prevent this asset….and its future appreciation….from being applied to a grantor’s estate. To accomplish this, if the asset is illiquid, formal valuations are typically needed to ascertain a value to be used in order to account for what is transferred. Without diving into the mechanics of valuation, there are company, industry and other risks accounted for to discount said valuation through the application of risk premiums, effectively, reflecting the amount of uncertainty above the risk-free discount rate. This is in addition to discounts for lack of marketability or control typically associated with limited and/or nonvoting interests in illiquid assets like a privately held company. 

For marketable securities or assets, this process is far easier, given there are stated values that can be used (i.e. a stock price) to complete this process and there are few, if any, sectors of the worldwide economy which have not experienced significant devaluations the past few weeks. In an effort to correctly paint this as a glass half-full from an estate planning context, let me say this in more laymen’s terms. If you believe in the long-term growth potential and valuation of equities, then depressed market prices may offer an intriguing planning opportunity.

To simplify all of this, a client’s goal should be to identify assets, preferably illiquid, private, difficult to market, or otherwise discountable assets with high growth potential and use either annual gifts or gifts against your cumulative lifetime ability to transfer these discounted assets over the proverbial “estate planning fence” – in hopes of allowing future appreciation to happen in their estate, while using less of their annual or lifetime capacity. If these assets have temporarily depreciated in value, all the better!

So, if I can frame this even simpler. If you believe:

• That the markets will eventually recover at higher valuations and that…
• Once coronavirus treatments improve, and infection rates plateau that…
• Business will revert back to normalcy with eventual stock price corrections and that…
• Markets over the long-term market cycle will eventually recover as they historically always have, then…

You have an incredible opportunity at hand. 

No one likes to see their portfolios down or to feel the stress of revenue loss or potentially – even business interruption. But it is precisely these unfortunate circumstances, that accentuate the opportunity to combine historically low interest rate environment suited for advanced estate tax planning opportunities with temporarily lower or falling asset valuations. The most proactive and steady hands will have the greatest leverage available to them from a planning context. 

Opportunities abound even in the income tax planning world. We have clients considering making a “check-the-box election” in which they will be forced to recognize capital gains on the difference between their cost basis and valuation in 2020. Assets with significant exposure to global economic risks lead to higher risk premiums and consequently lower valuations. The net result? Less taxes now and greater opportunity down the line. 

How about something with greater reach? Perhaps clients will soon begin to consider fast-tracking Roth IRA conversions to pay the taxes at a time of both historically low marginal tax rates and depressed asset values. Perhaps the opportunity to lock in tax bill certainty today with the potential for reaping even greater rewards in the future, should valuations rebound, makes more sense than ever.

The Takeaway

Understand that none of this should be construed as recommendations but rather an argument for taking a pause from the hysteria and seeing if you can turn some proverbial lemons into lemonade. 

The recent economic turbulence and volatility in the markets should encourage you to pick up your phone and call your planning team. The door has opened to an incredible arbitrage opportunity only those willing to ignore the noise and stay committed to long term prudent financial planning will monetize. Those who take the above to heart will find unique opportunities to maximize their estate planning goals, leaving more wealth to their family and accelerating their ability to realize the value of their life’s work. 

So 2020…Bring it on!

Representatives do not provide tax and/or legal advice. Any discussion of taxes is for general informational purposes only, does not purport to be complete or cover every situation, and should not be construed as legal, tax or accounting advice. Clients should confer with their qualified legal, tax and accounting advisors as appropriate. 

Garrett Hurley is a registered representative of and offers securities and investment advisory services through MML Investors Services, LLC. Member SIPC  www.SIPC.org  Brix Partners is not a subsidiary or affiliate of MML Investors Services, LLC, or its affiliated companies. 6 Corporate Drive, Shelton, CT 06484; Tel 203-513-6000. CA Insurance Lic # 0H81660.

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