During unforeseen moments of adversity, mortality, and economic decline such as what we are all experiencing right now, it forces each of us to confront the realities of our situation, for better or for worse. While some of us may be sheltered in our homes with a little extra time on our hands, and others may have little time to spare as they scramble to stay in control of things, this is the perfect time to reflect, regroup, and restructure your affairs to either respond to or take advantage of your new reality. Specifically, this is the time for you to revisit your:
- Estate Planning Documents
- Asset Protection Structure
- Wealth Transfer Planning
- Reformation/Litigation of Contracts
- Documenting/Securing Receivables
- COVID Legislative Compliance/Guidance
Estate Planning Documents
For most people, their estate plans were either outdated prior to this pandemic and economic crash, or due to the rapid economic decline, their estate plans have just become outdated. In either case, use this time to think about and update your estate plan:
Wills and Trusts – Wills and Trusts are used to appoint guardians for your children, executors of your estate, trustees of the various trusts you might create, ensure proper distribution of your assets per your desires, and to minimize taxes. This is a good time to review all of your appointments in your wills/trusts to ensure the right people are named. Also, given your current asset base, you may want or need to revise your intended distribution ages, amounts, and standards. Lastly, with the state and federal laws often differing on estate taxes, in combination with what is likely a decreased asset base, your tax minimization structuring may be incorrect or unnecessary complicated. These issues can be readily identified and fixed.
Powers of Attorney For You – Powers of Attorney for Health Care Decisions and Powers of Attorney for Financial Decisions are used to designate agents to act on your behalf in the event of your incapacity. In times of increased threat to your health, it is important to review the agents you have designated to ensure they are the proper individuals for you at this time. If your documents are outdated, it is likely that the individuals you have selected are not optimal, or if your kids are now of age, you may prefer to have them act as successor agents.
Powers of Attorney for Your Adult Children – With the health threat expanding to the younger demographic, this may be the ideal time to review with your adult children and have them create Health Care and Financial Powers of Attorney as well. Given the privacy rules under HIPPA, as well as online accounts and data, it is critical that you as parents have authority and access to act on their behalf during a period of incapacity.
Living Wills – Although it is never an enjoyable issue to contemplate, times like these do make us more mindful of our desires with respect to potential life-sustaining measures. Whether you want them applied or withheld is your choice; and if you are not clear by documenting it, the courts may step in instead – creating delay, confusion, frustration, and unnecessary expense.
Asset Protection Planning
As businesses get compromised as a result of the drastically declining economy, and as asset values may drop below required thresholds, it is important to analyze your entire asset base to see if you can make prudent moves now to protect them – before any potential lawsuits are filed against you. Depending on your circumstance, there may be some simple measures you can take, such as maximizing certain exempt assets in your structure, or more complicated measures, including asset protection trusts, LLCs, or additional business entities. What is allowable or preferred is tied to your unique set of facts, but in all cases one truism will hold – the sooner you act to insulate your asset base, the better.
Wealth Transfer Planning
For those who have taxable estates – generally an estate in excess of $23 million for a married couple – this particular moment in time, even though awful, is an exceptional time for wealth transfer planning. We saw similar opportunities, and capitalized greatly on them, in 2001 and 2008. When the equity market melts down as it is now, and mergers and acquisitions come to a halt, and we are mired in financial uncertainty, valuations of companies, portfolio assets, and even real estate all plummet. For wealth transfer purposes, this creates a rare arbitrage where you can exploit the current low valuations to transfer an asset for estate and gift tax purposes with a reported value at much less than you know its inherent value to be, and where it will likely return. The result is the ability to transfer a much greater percentage of your assets to the next generation free of tax than would otherwise have been the case. A few preferred ways to accomplish this are:
Straight Gift – The simplest transfer structure, a straight gift is the direct transfer of the lower-valued asset to the next generation(s), with the expectation the lost value will be restored. You transfer it at today’s low value into their name, and the asset value plus all appreciation thereon, will escape estate and gift tax.
“Freeze” Transaction – Instead of transferring the asset plus appreciation, a “freeze” transaction is one that only transfers the appreciation. There is no better time to enter into a freeze transaction for your business or portfolio interests than now, since the initial asset value is artificially deflated, and since interest rates are at all-time lows. In order for a freeze transaction to be respected, it is required to carry certain mandated interest rates – rates which can differ slightly based on the specific structure of the transaction – but all of which are wonderfully low right now, which is to the taxpayer’s great benefit. As long as the anticipated appreciation beats the applicable interest rate, which will likely be between 1-2%, the transaction will work in the transferor’s favor. Typical freeze transactions include: 1) Grantor Retained Annuity Trusts (“GRATs”), 2) Sales to Intentionally Defective Grantor Trusts (“IDGTs”), 3) Qualified Personal Residence Trusts (“QPRTs”), 4) intrafamily loans to buy the asset, or 5) a straight sale of the asset. All present great options for a prospective transfer, but need to be properly matched to your set of circumstances.
Transfer Planning Via a Family LLC – The optimal way to enter into either the straight gift or the freeze transaction is not directly to the descendant, but rather indirectly through the use of a Family Limited Liability Company. The typical Family LLC model uses a Limited Liability Company to own the various assets – assets which now have a depressed value. The LLC structure has the following benefits over the direct gift: 1) additional asset protection; 2) retention of control; 3) further reduction in value and estate tax minimization through the use of certain valuation discounts, where applicable; 4) potential income tax minimization through deduction planning or shifting of income; 5) fostering greater permanence of the assets through aggregation; and 6) creating a platform for rearing of the next generation.
Reformation/Litigation of Contracts
Most business owners are feeling the pressures created by the recent downturn. Contracts that were in place based on a certain set of assumptions are creating financial obligations that can either make the contracts, or worse, the company, no longer viable. In order to protect the viability of the company, these contractual arrangements need to be reformed to a level that is suitable or contested outright. The best time to renegotiate the contract is at present when the outlook is bleak for the overall economy as well as the other party to the contract. Waiting to renegotiate could be damaging if the economy starts to slowly recover before you consummate. So it is best to act immediately while your leverage is highest or at least where the other party is equally sympathetic or affected. For those contracts that can’t be renegotiated, you will likely have to litigate to break the contract. Theories to be pursued will include force majeure, impracticability, or impossibility. The positioning of these claims will depend on the terms of the contract as well as the legal precedent in your state. Given the extreme circumstances we have just been subjected to, you might be able to seek relief from your overly burdensome contractual obligations.
Documenting/Securing Amounts Owed to You
If you are owed money at this point in time, your prospects of collecting just became somewhat impaired. Debtors will be cash-strapped and will be tighter and slower with their dollars. If you are held out, and do not proactively address it, you are exposing yourself greatly and will likely suffer losses if/when your clients and customers declare bankruptcy. One way to improve your legal position with those who owe you is to reduce their payable to a formal promissory note. In this manner, if there is a default, you only need to enforce the note, and not litigate the underlying obligations and facts of the dispute. This will expedite and maximize recovery, while saving you legal fees by avoiding a more complex litigation on the merits. In addition, since many will declare bankruptcy protections as a result of this crisis, it will be a race to secure your debts before others so that you are a senior and preferred creditor if that happens. You should get a note payable, and secure it as soon as possible to get in line with superiority over other creditors. Whether it is in the form of a mortgage, stock pledge, or UCC lien, it is in your best interests at this point in time secure and perfect as many debts owed to you as possible.
COVID Legislation Guidance/Compliance
Given the unprecedented nature of the COVID-19 crisis and the resulting economic meltdown, this situation is very fluid with new legislative solutions, rules, and opportunities coming out each week. You need to ensure you are fully compliant with the rules imposed upon you, and you need to ensure you are taking advantage of all economic benefit or financial opportunities that may be granted. Seek out immediate help to see what guidance is out there, what your compliance obligations might be, and hopefully to see where you may actually have a benefit under the resulting laws. For example, SBA loans may be readily available to you under circumstances you might not have qualified for in the past.
As you can see from the foregoing, there are many moving parts in one’s plan, and whether you are impacted by all or just one of the items listed, you should seek out capable counsel as you seek to restructure. These are complex issues in a complex moment in time, and in order to plan with the greatest impact and confidence, you should not try to go it alone – you have enough burden to carry. Please do not hesitate to contact DUGGAN BERTSCH if we can assist you in any way during this challenging time.