May 28

Written by: David Keligian
5/28/2020 3:39 PM  RssIcon

In his classic book “Think and Grow Rich”, Napoleon Hill said “Every failure brings with it the seed of an equivalent success”. Finding the “seed of equivalent success” seems difficult when we see valuations—regardless of asset class—collapsing before our eyes. With few exceptions, as the U.S. economy has been shut down, the COVID 19 pandemic has hurt business values, real estate values, and investment holdings alike.

However, for those of significant wealth, there is an opportunity to take advantage of the crisis. You can maximize tax savings by acting while asset values are still depressed. In part, this opportunity is based on the consensus view that given the government’s massive spending to avoid a financial collapse, taxes will increase.

In a recent Forbes interview, Leon Cooperman, Chairman of Omega Advisors and a billionaire investor, opined that the recent government intervention in the U.S. economy would result in more government regulation and higher taxes. With respect to the pending presidential election, Cooperman stated: “Regardless of who wins, taxes will have to be raised. Quickly, if Biden wins; slowly, if Trump wins—but taxes have to go up”.

It’s fairly safe to predict that after the massive government spending triggered by the pandemic, there will be greater pressure to raise taxes. For those voters who have lost businesses and jobs, their sentiment will favor tax increases as well. Increased income taxes, and especially wealth taxes, will be on the table.

It is more likely than several months ago we may have a Democrat President, but even if the Republicans hold the presidency, it’s a good bet that estate taxes will rise, either by new legislation or by letting the current high estate and gift tax exemptions expire in 2026. There is also more risk that states like California will decide it’s time for a wealth tax.

Despite recent wealth losses, current conditions present a unique opportunity for wealth transfers now:

1. Regardless of asset class—stock, bonds, real estate, business interests—values are depressed. Since estate taxes are imposed on value, the best time to make transfers is before values eventually recover.

2. Due to market volatility, valuations are now subject to much higher valuation discounts.

3. There is the distinct possibility that the huge budget deficits at the federal and state levels will eventually trigger inflation once the pandemic is over. That will increase the nominal value of virtually every asset class.

4. The IRS interest rates for May have dropped dramatically. For example, the May mid-term AFR rate for loans of up to 9 years is .58%. That’s lower than the Payroll Protection Program loan rate of 1%. The current low rates lower the cost of wealth transfers.

Transferring wealth now will maximize savings. Even if estate taxes don’t rise and there is no inflation, transferring wealth now, while values are depressed and interest rates are low, is counter-intuitive but smart.

Let’s say you own real estate, and the value of your properties has dropped from $200,000,000 to $100,000,000. If you make whatever transfers you can afford to make now, instead of waiting, acting now will transfer more wealth, at less cost, to your family. If done properly, that will enhance family wealth for generations.

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Copyright ©2020 David Keligian