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Back to the Future: How Inflation, COVID, Supply Chain, and Other Economic Pressures Can Help with Your Estate Planning

Back to the Future: How Inflation, COVID, Supply Chain, and Other Economic Pressures Can Help with Your Estate Planning

We pay estate tax on the assets we own when we die, but one great way to reduce those taxes is to transfer wealth during lifetime.  Of course, when we make a significant gift of wealth during our life, we use some of our lifetime gift tax exemption. Generally speaking, our assets increase in value over time. The idea is to transfer an appreciating asset now, so that any future growth will not be subject to estate taxes when we die. When transferring wealth to family, we generally look for two opportunities: First, we look to transfer assets that will grow in the hands of the recipients, and second, we look for undervalued assets that would use less exemption now, while perhaps growing disproportionately in the hands of the recipient.  Our current economic environment allows us special opportunities to take advantage of these concepts.

Business Valuations

There is a lot of pressure leading to lower business and asset valuations. COVID has played a huge role in rapid inflation, supply chain issues, and other economic pressures many businesses currently face. Inflation has increased the cost of everyday necessities, such as gas and groceries. Supply chain issues have also increased overall costs of products and services. For example, many parts used for manufacturing vehicles have been difficult to acquire, making it challenging to produce the quantity of vehicles that dealerships could before desire. This results in an increased cost for vehicle due to low inventory amidst strong demand.

There has also been a shortage of qualified employees. This results in current employees becoming drained from taking on extra work due to the lack of co-workers.  The labor shortage has also led to high employee turnover, which ultimately creates a short-term reduction in profit.

Commercial Real Estate Holding Company Valuations

COVID created a work from home culture that challenges the need for office space. With many employees not working from the business office, the space quickly becomes less used and less desirable.

On-line shopping continues to impact traditional “brick and mortar” retail. On-line shopping has become the fast and easy way to shop without leaving your home. But with on-line shopping, comes negative impact on traditional “brick and mortar” stores.

The increase of high interest rates makes borrowing for improvements less attractive. High interest rates are impacting the purchasing power of potential buyers and causing lenders to be nervous and cautious.

Securities Only Investment Holding Company Valuations

Securities prices are down 20-30% and lower interest bond portfolio pricing is depressed. Some companies are reducing dividends, while others are laying off workers or reducing future growth expectations to save. Volatility makes valuations uncertain.

The Impact of Control on Valuations

If the client makes a transfer less than a controlling interest in an entity like those discussed above, simply by only transferring non-voting shares of the enterprise, a lack of control adjustment reduces the valuation even more and further leverages the gift and estate tax efficiency of the transfer. Closely held companies can also enjoy a lack of marketability adjustment. In combination, these valuation “discounts” can exceed 35%, allowing smart clients to efficiently transfer wealth to their beneficiaries.

Contact us today to discuss how to transfer your wealth while retaining control, retaining income, preserving exemptions, freezing, or reducing assets subject to estate tax, and growing assets outside of your taxable estate.