By David Rudman, CPA/ABV, CVA
With the current Coronavirus outbreak worldwide, COVID-19 has caused many businesses, securities, and real estate investments to decline in value. While the underlying forces causing these declines in value have been very painful to endure, significant opportunities exist for those interested in transferring wealth, or for estates needing to file estate tax returns where the decedent died during the six month period prior to turmoil caused by COVID-19.
At this time, we are working with the perspective that the current economic cycle peaked sometime around Mid-February, when it became clear that COVID-19 was going to cause an inflection point in our economy.
Real Estate Values
For real estate appraisals that we prepare with valuation dates prior to February 15, 2020, we had been forecasting that values were increasing modestly and steadily, in line with economic activity. For valuation dates after February 15th, we are forecasting decreasing values. Further, we are of the opinion that this recessionary inflection will be sharp, with steep declines and the possibility of additional declines in the coming months. Our research analysts are currently working to quantify the amount of these declines. For each engagement, our analysis will be specific to the appraisal subject, as not all properties are subject to the same considerations. Currently, we are working with the hypothesis that initial declines in value could be in the range of 10% to 35% with additional potential declines later this year.
Marketable Securities & Hedge Fund Interests
As observed in the stock market, publicly traded securities have experienced incredible volatility and generally have declined in value from their peak on or around February 19, 2020. These material declines are expected to recover over time, so an opportunity exists to take advantage of planning opportunities at lower values.
With regard to operating businesses, while all industries are being affected, certain industries are being negatively impacted more than others by COVID-19. As a result, each valuation will require a case by case analysis to determine the potential impact on revenue, profitability, and value. As one might expect, many businesses are seeing significant declines in value, which may increase further as more time passes.
Estate Tax Considerations
For estates owning real estate and/or operating businesses with dates of death falling roughly between August 15, 2019 and February 15, 2020, executors and their advisors should strongly consider using the alternate valuation date (six months after the date of death) where lower values are beneficial.
For estates owning marketable securities or hedge fund interests, any decision to select the alternate valuation date will depend on the comparison of values as of the date of death and alternate valuation date. Despite the sharp drop in equity prices from the peak on or around February 19th, there were significant increases in equity prices from January 1 through February 19, 2020. Most, if not all of these gains were given back, but it is not a foregone conclusion that it will make sense for all estates to select the alternate valuation date, as a date-to-date valuation comparison will be required.
Gift Tax Considerations
Logically, estate and gift tax planning exercises usually favor lower values. For estates that will be subject to federal or state estate tax or state inheritance tax, this is an opportunity to consider transferring assets or businesses with temporarily reduced-values in a tax-beneficial manner.
About Sigma Valuation Consulting, Inc.
Sigma Valuation is a full-service business valuation and commercial real estate appraisal firm with one of the leading estate and gift valuation practices in New York, New Jersey and Connecticut. Feel free to contact us at your convenience to discuss how we can help you or your clients during these tough times.