services: Valuation

For owner-operators of wineries and other closely-held businesses, now may be an opportune time to maximize estate planning through the utilization of gifts of ownership interests. The Tax Cuts and Jobs Act of 2017 has been broadly seen as favorable to businesses, high-net-worth individuals and estates, including the temporary doubling of the lifetime federal exemption for gift, estate and generation-skipping taxes, which stands at $11.7 million in 2021. However, the combination of a new administration, as well as increasing federal deficits in the wake of the COVID-19 pandemic fallout and federal response, means the higher lifetime exemption may be in jeopardy. Many in the tax policy and preparation communities are expecting the newly-elected Congress and administration to roll back some of these perks. And among the potential early targets is the larger estate tax exemption, which is already set to sunset at the end of 2025 without further action from Congress.

Owner-operators of successful businesses likely already have some familiarity with the estate tax, which is a federal tax on the transfer of property from a deceased person. This tax works in conjunction with the federal gift tax, which applies to transfers of property during one’s lifetime. In theory, both estate transfers and gifts made during one’s lifetime are taxed according to progressive structure that begins at 18% and steps up to a maximum marginal rate of 40%.

There are important exceptions to both taxes, however. The gift tax annual exclusion allows individuals to gift up to $15,000 per recipient per year tax-free. The lifetime gift tax exemption currently stands at $11.7 million, as mentioned above. This maximum represents the allowable sum of all taxable gift, estate and generation-skipping giving prior to taxes being due. These figures play a key role in estate planning, while the temporary nature of the higher lifetime exemption has created a level of urgency in many estate strategies.

President Biden’s campaign platform called for returning the estate tax exemption to its pre-TCJA level of $5.49 million, plus inflation. Political analysts expect this policy to be among the Democrats’ top priorities. This puts some pressure on larger estates that may be affected, including many winery owners. In order to utilize the higher short term exemption figure, many high-net-worth estates are acting urgently to accelerate their estate planning strategies to avoid a potential far more substantial estate tax burden.

Even in an increasingly corporatized wine space, many wineries continue to be family-owned businesses. Many owners of closely-held wineries, desiring to keep their legacy in the family, already intend to pass down the business upon their death to their children or other inheritors. The increasing likelihood of a rollback on the lifetime exemption means winery owners may want to consider transferring at least some portion of their business in the near future via gift, rather than waiting until death.

Transferring now could also benefit from the decreased business valuations we are still seeing in many segments due to the impacts of the COVID-19 pandemic. While certain industry segments have recovered to or even exceeded their pre-COVID sales, many closely-held wineries are experiencing challenges such as reduced tasting room visits and lower sales to restaurant customers, which often contributes to a lower business valuation. A lower valuation means a smaller gift in the eyes of the IRS, which could mean less taxes or even avoiding them altogether.

The simultaneous existence of these two potential short term tax-related benefits will not be here for long. This is a unique opportunity for winery owners to take care of what they were already planning to do down the line, while taking advantage of historically favorable tax conditions.

Rigorous, reliable valuations that stand up to scrutiny are an essential component of making major gifts, as they help determine the amount of taxes the federal (and sometimes state) government will collect on the transfer. BPM’s Valuations team has extensive experience delivering clients valuations of closely-held business interests and other assets that meet the strict requirements promulgated by the IRS for a qualified appraisal for gift or estate tax purposes. Our accredited business valuation leaders bring highly-specialized industry expertise to client projects. Our approach is hands-on and thorough, and we are recognized as one of the top business valuation firms in California operating hand-in-hand with our exceptional tax team. To learn more about how our team can help you execute the best estate transfer plan in light of recent developments, contact Kemp Moyer, Valuations team leader, today.

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