Transferring Family Wealth during a Pandemic
The first quarter of 2020 saw record drops in stock values of public companies. The Dow Jones Industrial Average was down 22% for the quarter. Headlines were full of bad news related to the coronavirus pandemic, from losses to job cuts to bankruptcies. Some industries were harder hit than others. For example, energy industry stocks dropped by 51% while health care and technology sectors dropped by only 12%. (Based on S&P 500 industry sector performance).
A drop in the value of public companies does not necessarily translate into a similar drop in private company stock values. However, stock market performance is certainly one of the considerations when performing a private company valuation.
Valuation of private companies is based primarily on expectations of future operating performance. If the pandemic and related financial downturn have caused a decrease in the sales and profits of a private company, now and for the foreseeable future, that company’s value will likely be negatively impacted. The uncertainty in the economy and the unknown timeline for reopening businesses and getting back to “normal” are also negatively impacting value.
Although this news can be initially depressing, there is tremendous opportunity to transfer family wealth to the next generation when values are down. The Federal Government transfer tax system is based on the “Fair Market Value” of the asset transferred. When the value of the asset is lower than historic levels, an owner can transfer a larger number of shares in a quicker timeframe.
Let’s say you have an asset that had a value of $1,000 prior to the COVID-19 Pandemic. It could be a public company stock that now trades at $700. It could be a private family business that probably suffered a similar decrease in value. Now is the time to transfer these assets to the next generation.
The transfer of assets from one taxpayer to another must be reported on a Federal Gift Tax Return, Form 709. The value of the asset must be adequately disclosed to limit the time period for the IRS to question the value reported. Your life-time gifts and ultimately the remaining assets your family members inherit are subject to Federal gift and estate tax based on “fair market value”. The higher the “fair market value” the greater the tax. Gifts of private companies and family limited partnerships holding marketable securities are inherently subjectively valued.
Subjective values must be disclosed on the tax return and supported by a qualified appraisal or detailed description of the method used to determine fair market value. The qualified appraisal should consider all economic factors of the business, applicable discounts of value, and the economic environment at the date of the valuation.
The coronavirus will be controlled, and the economy will improve! As this happens, values will increase. Take advantage of this tax planning opportunity while the time is right. Transfer assets to family members when the fair market values are low.
How Barnes Dennig can help
Our team of Certified Valuation Analysts have performed over a thousand valuation engagements and calculations. We can help owners decide if now is the opportune time to move forward with a valuation analysis. Our services include a Calculation of Value to assist in planning for gifts or transfers, and a more comprehensive Valuation Engagement that meets all IRS requirements to support gifts and transfers.
Our Transaction Advisory Services team can assist you if you are considering a sale of a company or you are looking for an equity infusion or debt restructure to get through the crisis. We also represent buyers in many industries looking for growth opportunities.
Contact us today to speak to a member of our team and see what options make the most sense for your business.