The Coronavirus is leaving a path of economic devastation, transforming the landscape of investing and taxation, and it’s challenging families to act on new risks and opportunities in managing their wealth. It’s an abrupt change in conditions, and it amounts to a "perfect storm“ threatening family wealth.
Across the nation, state governments are forecasting huge budget shortfalls State and city tax revenues have plunged in the pandemic but government services, like transportation and police, continued to be provided, with no letup in expenses. Meanwhile, federal government emergency stimulus payments to individuals and financial aid to businesses have added a whopping $2.4 trillion to Uncle Sam’s long-term debt! And for the first time, the national debt is larger than the annual gross domestic product! With hikes to state and federal income taxes as well as transfer taxes on the horizon, it’s wise to review your situation with this new tax outlook in mind.
For individuals with taxable estates, the current $11.58 million per person exemption from estate and gift tax will be cut in less than half on January 1, 2026. However, the exemption amount could be slashed much sooner, depending on the outcome of the November 3 election. Maximizing annual gift-tax exclusions, making charitable donations, and establishing trusts can make a big difference in preserving your family’s values, and the downside risk of failing to plan has increased.
Every month, the IRS releases the minimum interest rates you are permitted to charge on loans to family members, trusts, and other entities. With this "applicable federal rate" currently at less than 1%, loans may be a savvy way to transfer wealth to the next generation for buying a home, starting a business, or making charitable bequests. With the pandemic potentially lowering the value of real estate and business assets, and frequently causing stock market volatility, optimizing low rates to make intrafamily loans may suddenly be a more viable solution to reduce taxes and boost your legacy.
Finally, with tenants more often unable to pay rent, and a tidal wave of small business failures expected, landlords and business owners suddenly face an explosion in their liability exposure. Asset protection strategies to mitigate personal liability and creditor exposure require preparation before a problem arises or may not hold up to legal challenge.
The destruction wrought by the virus crisis has changed tax and financial conditions and requires proactive engagement of family members as well as advice from tax, legal and financial professionals.
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