A crisis doesn’t always have negative connotations. It comes from the Greek word krisis, which means “decisive moment.”
We are all painfully aware of the dark sides of the COVID-19 pandemic, but there have been positives for many of us too.
The disruptive nature of the experience has caused us to reflect and reevaluate what is important, and the tragic consequences suffered by many have highlighted the importance of planning. The unwinding of a family or closely-held business or preparing for our own final act have taken on a new urgency.
Several areas to consider include the gifting or sale of a business to family, family loans, business succession planning, and legal and health care directives. These topics can be challenging to discuss, but it is far worse to be unprepared when faced with a crisis.
Here are some opportunities to consider:
Business assets can be worth much less due to the economic impact of the virus. This creates opportunities for business owners to transfer a greater portion of business assets and reduce their taxable estate. The key is to take advantage of a drop in asset value when you expect the assets to rebound after the gift. Given the uncertainty around future gift and estate tax exemption levels, it is a good time to revisit estate planning with your financial advisor and/or attorney.
If the desire is to sell the business to family or to provide a loan to a family member, you can take advantage of historically low interest rates. The IRS publishes monthly minimum rates that must be used in loan transactions between family members for gift taxation purposes. These “applicable federal rates” (AFRs) for family loans could provide a business owner with income or be useful if the estate/gift tax exemption has already been used. Any growth in the value of the business will benefit the purchaser free of any gift tax.
A trust can be invaluable when planning for the future. There are several trusts that can be advantageous during times of market volatility and low valuations. A GRAT, for example, is an irrevocable trust which provides a stream of payments (i.e., an annuity) to the grantor of the trust, while leaving the balance of the trust to future generations. It can be a very effective way of transferring wealth while consuming little, if any, of the grantor’s gift tax exemption.
An estate planning attorney can help you explore GRATS (grantor-retained annuity trusts), IDGT (intentionally defective grantor trusts), and CLATS (charitable lead annuity trusts) among others.
Business Succession Plans
It is important to have legal documents in place that will enable the business to operate without you – short-term or long-term. There needs to be someone designated to make business decisions and sign checks on your behalf, for example. Remember, you will want to review your plan periodically to ensure it is up-to-date and that partners and staff are willing and able to step in.
Legal Powers of Attorney
A durable power of attorney (POA) is an effective way to manage your property should you become disabled. A frequent use of a POA is when a business owner is disabled, ill, or unavailable to sign legal documents for financial transactions. A power of attorney can lapse for various reasons such as death and divorce, so it is important to work with a professional to be sure you are prepared for any eventuality.
Health Care Directives
It is of the utmost importance for your estate plan to have instructions for decision making should you become ill. Advanced directive is a general term for various health-related documents such as a living will (your instructions on treatments you do and do not want to receive) and a health care power of attorney (names the person you want to make health-related decisions when you cannot). Most states have their own form to eliminate any confusion during a medical crisis.
While considering death or disability may be the last thing anyone wants to plan for, the pandemic reminds us just how precarious life is. And as most business owners know, in the middle of a crisis is not the time to start the planning process.
CFP® AEP®, Managing Partner, Senior Wealth Advisor