Media

Valuation for Succession Planning, Retirement, and Death

If you own a business and have ever wondered what it is actually worth, or, if you have given serious thought on what will happen to your business upon death and what the ultimate impact would be on family members from a cash flow perspective, then you may want to consider succession planning.

One of the key areas in any suitable succession plan is to know what your business is worth.  This added benefit allows for appropriate decision-making regarding your business.  Whether selling it to an outside party, or gifting it to a family member, it is ultimately up to you and your future cash flow needs.

Gifting an interest in a business is one of the most effective and efficient methods to start planning for ones future.  By gifting the interest, one has removed the asset from their name, and ultimately from their estate, at the time of death.

Family limited partnerships (“FLP”) have gained a lot of popularity over the years as an estate planning tool and a way to depress transfer tax value.  It is important to note that the IRS has been trying to legislate discounts out of existence on FLP's and similar entities.  Although this is an area to look out for one should note that the legislation never seems to get too far in congress.

Key pieces of information to be aware of when performing a valuation:

The type of report.  The valuation standards indicate that a report for estate and trust filing should be a detailed report.  There is no simple straight-forward answer to what a detailed report is.  There is no required page count that once reached qualifies the report as detailed.  The best guidance is that one needs to follow the eight steps of Revenue Ruling 59-60 and, for gift tax purposes, adhere to the IRS adequate disclosure rules as outlined in Regulation Section 301.6501.

If a valuation was performed for gift tax filing and the IRS has deemed that it does not meet the adequate disclosure rule then the statue does not close after three years.  Thus, the IRS is allowed to re-open the gift filing return at any point in time including at the time the estate return is filled.  The impact of this is on a case-by-case basis depending on the outcome of the IRS challenge.  What one can expect is a potential increase in taxes, fines, penalties, and/or an increased loss to the life time exclusion if the value of the gift is deemed to be higher.
Although the IRS adequate disclosure rules and regulations specifically relate to gift tax filings, including the same information in a report for estate tax purposes is strongly encouraged by both the IRS and the valuation standards as this will aid you in preparing a well-supported report.  A well-supported detailed report from the onset well help to lower the chances of an IRS audit, and, if an audit is conducted, will increase your chances of a successful outcome in your favor. For estate and trust purposes, a calculation of value, oral report or summary report are not permitted as they do not meet the requirements set forth by the IRS and leave one vulnerable to an increased audit risk as the IRS does not have a need for all information in order to make an informed decision on the concluded value.

At the end of the day, any decision should not be made in a vacuum which is why it is imperative to have all your consultants and advisors apprised of all key factors along the way.  This will help you to make an informed decision that will help protect you and your loved ones in the future when you are no longer here.
 
For more information on Valuations, contact Pasquale Rafanelli, Valuation Manager of Grassi & Co., at prafanelli@grassicpas.com.
 
You may share a link to this page on any of the sites listed below: