COVID-19 and Uncertainties Create Opportunity for Wealth Succession

Boxer Mike Tyson once said that “everybody has a plan until they get hit”.  Americans have been hit hard in the past few months and most did not have a plan for a global pandemic.  However, there is a unique window for individuals to address the transition of family wealth and create a plan for generational prosperity.

There are three variables that create this unique window:

Economic Uncertainty – Many governments, businesses, and schools are closed as the world tries to slow the invisible enemy known as COVID-19.  Generally, American’s have been under “Stay at Home” orders and encouraged to leave their homes only to get necessary exercise, medicine or food.  The U.S. equities indexes are down 30% from their February highs.  Many industries have been significantly impacted short-term without any warning and there remains tremendous uncertainty of the long-term impacts.  The concerns of many that the economy may have peaked in 2019 were met with the 2020 recession related to COVID-19.  Most businesses and investment portfolios are worth significantly less today than they were at December 31, 2019 and creates a window to evaluate wealth transfers while values are down.

Political Uncertainty – In 2026, the current $23 million estate exclusion for married couples will sunset and revert to 2017 levels which will be approximately $12 million for a married couple. Beyond that known sunset, 2020 is an election year in the U.S. which could bring significant changes to tax legislation.  The presumptive Democratic Presidential candidate has indicated a plan to eliminate the “basis step up” of tax basis at death.  For many Americans, the elimination of a basis step up would effectively replace the estate exclusion with the capital gain tax.  If the Republican’s lose the U.S. Senate in November, the Democrats may address the goal of “redistribution of wealth” by setting an estate exclusion below the targeted $12 million in 2026.  The political uncertainty creates the need to evaluate wealth succession strategies in 2020.

Gray Tsunami – 50% of private businesses are owned by Baby Boomers who are now ages 56-75, have 80% of their wealth tied up in their businesses and 75% plan on transitioning them over the next 10 years.  Less than 30% of business owners are expected to do this successfully.  Including the privately held businesses, IRAs and real estate, it is estimated that $68 trillion of Boomer wealth will be transitioned to Generation X, Millennials and Post Millennials over the next 25 years.   These younger Americans are often unprepared to assume this responsibility because many of the Boomers have been focused on managing and growing their wealth, not transferring it. Baby Boomers need to evaluate their current wealth management strategy and assess any changes that may be appropriate to increase the likelihood that succession will be successful.

What is the Impact the value of a small business and/or core assets?  The current economic climate places an emphasis on liquidity and core assets have uncertain futures that generally drive down earnings and increase risk.  The pressures on the American consumer have been turned up and may not normalize for some time, creating fluctuations that are difficult to quantify on most core assets.  Debt is a tool used by investors to lower cost of capital, which allow market multiples to grow.  In a recession, the use of debt is restricted, drives up cost of capital and will put pressure on most market multiples.  Compounding the uncertainty, the government’s objective of using temporary programs to artificially stimulate small business to maintain employment levels only adds additional challenges to understand what “expected” operations will look like in the future.  COVID-19 has created many changes, most of which have resulted in an uncertain outlook for core assets and small businesses, which has driven down the value.

Call To Action – It appears to be an opportune time to transfer equity where the business or assets are at a low value and where the value of those core assets are expected to return in the future with appropriate management and oversight.  Maybe more important than the core asset’s value returning, most owners will be rolling up their sleeves and addressing steps to restart or reestablish their business.  What a great opportunity to transition knowledge to the successor generation?  Many Boomers have shielded heirs from these types of decisions and should look at this as a great time to educate heirs on attributes that make them successful.

COVID-19 may have undermined most every plan that has been in place but may present a unique opportunity for the transition of wealth: while values are down, before the estate exclusion may be significantly changed and where Boomers are facing generational wealth transfer.  We are working with a lot of clients that look at this as an opportunity to work with their heirs and position them for success in the future.

Boyer & Ritter has a team of skilled professionals that can work with your family, your advisers and you to evaluate your succession plan and assess if any actions should be accelerated or changed.  We are uniquely positioned to work with you to understand the impact on income and estate taxes and to align the financial needs of your family with the core assets you have worked so hard to accumulate.

Thomas J. Taricani, CPA/ABV, CVA, CEPA, is a principal of Boyer & Ritter providing audit, accounting, tax and consulting services. His specializations include formulation and implementation of succession and estate plans, and preparation of business valuations of closely held businesses for use in succession, estate planning and various litigation engagements. Contact Tom at 814-234-6919 or ttaricani@cpabr.com