Challenging times in businesses may cause a lot of stress in the near term. However, there is a silver lining: the cornerstone of good planning is to take advantage of low asset values.
Think about tax loss harvesting - you sell stocks when they are down and buy them back, capturing the loss to offset other gains. You have benefited from a “down market.”
This concept carries over to estate and income tax planning for other types of assets as well.
There are 4 major struggles that I can think of in different industries that I deal with:
Merchant cash advance: the Yellowstone case has thrown the industry into panic mode
source: https://lnkd.in/e7yf52JN
Home care: new legislation threatens to wipe out CDPAP in NY. This would erase many businesses entirely.
source: https://lnkd.in/eJrTBMZf
Child Service advocacy: new legislation threatens to greatly reduce the margin for advocate firms.
source: https://lnkd.in/eGK9Hzuu
Multifamily real estate bought at low caps in the past few years has been reset to much higher cap rates, putting many syndicators underwater.
source: https://lnkd.in/ermnsQBw
All of these things, and likely many more out there, threaten the earning prospects of many businesses.
This can be a good thing; if a business owner uses this high risk period to move their asset into a trust or other tax-advantaged vehicle at a low appraisal value, they can take home a massive tax win on a rebound in their business.
For example (I am ignoring IRS discounting in this example for those planning folks reading this):
Home Care business A was projected to make $5M of EBITDA this year, and grow at 5% per year for the next 5 years. Let’s say the appraiser uses a 7x multiple and calls this a $35M business this year.
Now, EBITDA projections for 2025 have dropped to $2.5, and growth can’t be counted on any more. This business may be appraised for $17M. Perhaps lower, as growth will now be negative for 2025 and may be projected at flat into the future.
The estate exemption amount per couple is now $25M, meaning that you can move up to $25M of assets into an irrevocable trust, which takes it out of your estate for estate tax purposes.
You went from having a $10M estate tax problem to having an extra $8M of room in your exemption amount.
There are many other creative ways that tax planning attorneys can structure things for major wins for depressed asset prices.
Disclaimer: For informational purposes only. This is not legal or tax advice!
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