On Wednesday, April 29th, 2020, the U.S. Bureau of Economic Analysis (BEA) released data showing that the United States economy shrank in Real GDP terms at a 4.8% annualized pace in the first quarter of 2020. At the same time, the International Monetary Fund reported the Real GDP slide in the U.S. was even higher, at a 5.9% annualized pace during the first quarter, with the larger North America region at a 6% annualized pace. With this data, many economic analysts seem to agree that the current COVID-19 pandemic has likely triggered the beginning of the deepest recession in decades, and correspondingly causing values of various companies and assets to contract and depressed vis-à-vis just prior to the COVID-19 pandemic. In response to this economic decline, the U.S. federal reserve reduced its target federal funds interest rate on March 16th, 2020, to 0-0.25%, with the benchmark U.S. Treasury 10-year bond hitting a record low yield on March 9th, 2020 at just 0.54%. This has resulted in the IRS reducing the Applicable Federal Rate (AFR) for three points along the yield curve to record lows, as illustrated in the below chart. Now, while this might not be welcome news on a whole, it does present an opportunity for certain families to take advantage of the depressed current fair market valuations and record low interest rates from a U.S. gift and estate tax perspective.

1 Each month the IRS provides interest rates for federal income tax purposes (or AFRs) which are regularly published as revenue rulings.

Definition of Fair Market Value, and Timing of FMV Assessment

Whether it be for income, estate or gift tax purposes, the “fair market value” standard is used to determine the value of property for tax purposes. Under U.S. federal tax principles, “fair market value” is defined to mean “the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell, and both having reasonable knowledge of all relevant facts.” For instance, in the context of real estate, the value for tax purposes is often computed based on its “highest and best use.” In the context of transfer tax valuation, the “willing buyer and willing seller” maxim is captured in the “arm’s length standard” that is used to determine whether income and deductions attributable to related parties in controlled transactions should be reallocated using various methods. The correct methodology necessary to determine fair market value will vary depending on the facts and circumstances of the specific property and the transaction being valued. The application of the various methodologies in performing valuations is not an exact science. That being said, what is also key to this analysis, not to mention relevant to this discussion, is the timing of the fair market value determination. In other words, at what point in time does the fair market value determination need to be made?

For income tax purposes, when the fair market value of property must be determined depends on the tax issue involved. For instance, the fair market value of a charitable contribution made in property must be determined at the time of contribution; whereas, the fair market value of property received as compensation must be determined as of the date when the rights of the person having the beneficial interest in the property are transferable or are not subject to a substantial risk of forfeiture.

For estate tax purposes, the fair market value of property includible in a decedent’s gross estate generally must be determined as of the decedent’s date of death. The sole (and limited) exception to the date of death rule is where an executor of the estate elects an alternative valuation method in order to decrease (not increase) the value of the gross estate and the sum of estate and generation-skipping tax imposed on the decedent’s estate.

For gift tax purposes, the fair market value of property given as a gift must be determined as of the date when the gift is complete. Depending on the type of property and/or donee, there are special rules that dictate the valuation method by which a specific type of property should be evaluated; nevertheless, the date on which the valuation must be made is clear, and here in lies one of the current opportunities from both a gift and income tax perspective.

What this means is that, given the current financial environment, business and asset valuations are broadly lower, despite the fact that normally income producing assets typically increase in value when interest rates are lowered. As such, those who have been contemplating family estate planning should seize the opportunity created by this crisis, and take advantage depressed current fair market values along with the record low interest rates.


The 2020 unified gift and estate tax exclusion amount is $11.58 million per U.S. citizen or domiciliary. This exclusion amount is scheduled to sunset under current law in 2026, and revert back to an amount inflation-adjusted from a $5 million base. Moreover, the IRS has previously issued guidance providing that gifts made before the scheduled 2026 sunset to be grandfathered under the higher exclusion for decedents dying after the sunset (i.e., after 2025). As such, the currently lower valuations of businesses and assets can reduce the gift tax exposure associated with making outright gifts of such property, and remove more assets from one’s future estate than previously available.

Inter-Family Sales and Loans

In certain circumstances, a family might prefer to sell property (or a portion thereof) to a family member as opposed to an outright gift for a variety of reasons, one of which might be to avoid the carry-over basis associated with a gift. Under this scenario, the sale will trigger any gain associated with the property to the selling family member which will be includable in income. However, with the depressed valuations, the selling family member may reduce the gain associated with the property sale, while still removing the appreciated asset from the selling family member’s future estate. This can be further compounded by applying certain typical discounts to reach an even lower fair market value of an entity or certain other property, such as discounts for lack of marketability and lack of control.

Further, where a private loan is associated with the sale (which is a common planning tool), the buying family member could take advantage of the lower interest rates which has the corollary of reducing interest income to the selling family member. This sort of planning is particularly attractive right now, and should be considered.

Finally, those who purchased assets as part of their past planning can also take advantage by refinancing their promissory obligations to lock in the lower rates.

Shareholder Loans

In a closely held corporate context, loans to a shareholder may be a way to take cash out of the company without incurring dividend tax treatment to the shareholder. Interest must be charged at least at the AFR, with such interest being income to the corporation. However, with the current record low AFR, the attractiveness of loans up to shareholders improves. Conversely, shareholders may now prefer to capitalize family businesses with debt versus equity given the low interest rates, especially with the flexibility that future debt capitalization provides. That being said, the above planning requires careful planning since special rules apply.


Grantor Retained Annuity Trusts (GRATs), like many estate planning tools, are more favorable when the fair market value of assets and interest rates are low. In a GRAT, the grantor transfers property that is anticipated to appreciate into an irrevocable trust in return for the right to receive fixed payments on at least an annual basis based upon the initial fair market value of the property. Essentially, a GRAT pushes the future appreciation of property out of the grantor’s taxable estate and into the trust in exchange for a cash down payment and a promissory note, wherein the grantor receives interest payments at the current low interest rates.


While all of us likely wish that we were not in the midst of this state of global crisis, the depressed current fair market valuations and record low interest rates does present a real opportunity for certain families to take advantage of one or more of the aforementioned estate planning techniques to reduce or potentially eliminate their future U.S. gift and estate tax exposure.

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