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Poway: Valuation Discounts For Estate And Gift Taxes

In Poway, many persons have a revocable living trust. This is an excellent estate planning strategy and the goals are to avoid probate fees and costs and also for privacy. A revocable living trust, however, is “tax neutral” and is not an advanced estate planning strategy. Our law firm of Law Office of Scott C. Soady, A Professional Corporation, LLP offers a complimentary consultation on advanced planning strategies and techniques in person, over the phone or by e mail. Our law firm works with Certified Public Accountants in the area of tax advice.

Upon the death of the owner of stock in a closely held corporation, the fair market value (“FMV”) of the stock must be determined before an estate tax return can be filed. For gifts of such stock, it is also necessary to ascertain the value of the stock for gift tax purposes. Unlike publicly traded stock, the value of which can be determined easily on the Internet or in a newspaper, stock in a closely held business has a value that is more difficult to nail down. By definition, the shares are held by a much smaller number of people and are not widely traded.

Fair market value means the price at which property would change hands between a willing buyer and a willing seller when neither party is under any compulsion to buy or sell and both parties have a reasonable knowledge of relevant facts. Calculating the FMV of closely held stock generally starts with an estimate of the total value of the closely held company itself. Application of discounts (or premiums) to account for the specific circumstances of the company then reduces (or increases) the FMV of the stock.

The process is highly focused on the particulars of each business. For example, in a recent decision by the United States Tax Court, the starting point in valuation of a decedent’s minority interest in a closely held family corporation was easier to figure, because the corporation was a holding company with a portfolio of widely traded securities that had readily ascertainable values. But that market value was discounted by 10% to take into account a buyer’s lack of control over the company and by another 15% for lack of marketability of the shares.

The Internal Revenue Service likes to keep an eye on valuation discounts, since they lead directly to a reduction in estate tax liability. Federal statutes, regulations, and Revenue Rulings have shed light on the use of valuation discounts. IRS Revenue Rulings have identified the following list of some primary criteria for determining the valuation discounts for closely held stock:

* nature and history of the business;

* outlook for the economy and the specific industry;

* book value of the stock and financial condition of the business;

* earning and dividend-paying capacities of the company;

* goodwill or other intangible value of the enterprise;

* sales of the stock and size of the block of stock to be valued; and
* market price of publicly traded stocks of corporations in the same or similar line of business.

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