Strategic Planning Amid Economic Uncertainty

April 17, 2020 | Category: Summit Sounds Off

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The Coronavirus has dealt the US Economy an unexpected blow, and business owners are faced with the challenging task of managing expenses and cash flow while being strategic for the eventual recovery.  While economic downturns are never enjoyable, they do present some planning opportunities.  Consider the following ideas as you navigate the current climate.

1. CARES Act – Unprecedented Federal assistance has been unleashed to stabilize the economy through the disruption caused by the virus. Much has already been written and distributed about the CARES Act and clients should reach out to their bankers, lawyers, and CPAs to take advantage of all aspects of the act including the Paycheck Protection Program providing assistance to business owners.

2. Adjust Qualified Plans – with cash flow a key focus, some firms may face difficulty funding their retirement plans for the 2020 plan year. Most plan adjustments typically need to occur prior to employees reaching 1,000 hours of service during the year, so action is critical.

Safe Harbor Changes – Employers with 401(k) Safe Harbor provisions can amend their plan to cease the mandatory contribution in hardship situations.

Freeze Defined Benefit Plans – For employers with Defined Benefit or Cash Balance plans, the combination of depressed asset prices due to market losses plus possible lower profits for the coming year could create a perfect storm. Lower assets require larger contributions and the normal annual benefits still accrue. A large required contribution when companies are strapped for cash could be a challenge. Consider freezing DB/CB plans for the 2020 year. This must be communicated to employees 45 days prior to reaching 1,000 hours of service in the plan year.

3. Utilize Depressed Valuations – Downturns and depressed values are never enjoyable, but the combination of lower prices and low interest rates can be strategic for long range planning:

• Succession Planning – lower valuations can allow families to transact privately held interest with lower defensible valuations. Lower values mean less capital gains taxes for sellers, and with proper planning, the lost value can be made up via compensation arrangements, retirement plans, or other benefits.

• Estate Planning Tools – Depressed values, fractional interests, and low interest rates are all beneficial for techniques like:

• Sales to Defective Grantor Trusts – lower values and interest rates make the cash flow of the arrangement easier

• Grantor Retained Annuity Trusts – lower values lead to a lower gift amount realized and lower payments via the annuity.

• Family Partnerships/LLCs – Real estate values may take a hit as rents come under pressure in a recession. If the plan is to move these assets to the next generation, lower values might be helpful. Fractionalized gifts receive discounted values and can further leverage the gift of assets when done with units in a partnership or LLC.

• Outright Gifts – more of the lifetime gift exemptions can be retained by gifting while asset prices are low. This is even more true if valuation discounts for lack of control and marketability are in play.  

No one is rooting for a long recession, and we all hope that the coronavirus abates in the months ahead. However, it seems clear that we are already in a self-made recession as a result of the protective measures society needed to implement. Once clients can get past the initial shock of it, and the necessary cash flow planning that accompanies every recession, there is an opportunity to be strategic. We would welcome the opportunity to talk with those who might benefit from planning through uncertain times.

Financial Advisors do not provide specific tax/legal advice and this information should not be considered as such. You should always consult your tax/legal advisor regarding your own specific tax/legal situation. TR# 3041136 DOFU 4/2020