Adequate Disclosure:

What's Required in a Valuation
for Gift and Estate Tax?

Whether it’s a gifting strategy or simply a probate matter, meeting adequate disclosure requirements is a fundamental element of effect tax planning. 

Adequate Disclosure for Estate and Gift Valuations

Although Tax Season may be over for this year, we should start talking about or at least considering issues for the future.  Gifting strategies are an effective and popular way to manage estate tax issues.  Gifting not only removes an asset from the estate – but it also removes any future appreciation in the value of that asset.   It’s the latter part that’s perhaps most interesting.  For assets that are not rapidly appreciating it’s less of a consideration.  But for many businesses – especially high growth companies- appreciation is a paramount concern.

In many cases this quickly appreciating asset is a privately held business with no readily available market value.  As such reporting that value can be troublesome as the part of the filing includes meeting adequate disclosure requirements.   We routinely appraise these assets to provide safe harbor, and frequently field questions as to what constitutes adequate disclosure.

Critical to transferring the assets in a trust or estate is providing the necessary information, not only to receive an accurate valuation, but also to follow IRS rules.  Those rules usually require the filing of a tax return, in the case of a gift, and a valuation that meets all the adequate disclosure requirements.  That will begin the three-year statute of limitations that the IRS has to audit the transfer.  Without this valuation and adequate disclosure, the statute of limitations does not begin to toll.

Information Requirements

In order to meet those adequate disclosure requirements, the following information must be included in the valuation:

Transfers are conducted at Fair Market Value, which is traditionally defined as: “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 relevant facts.” (Treasury Regulation Section 20.2031-1(b)).  In many cases gifts will be effected as non-controlling or non-marketable, thus triggering discounts for marketability (DLOM) or lack of control (DLOC).  As such disclosure also requires:

These items are, principally, the same that we take into account in determining any discounts or premiums applied to a valuation.   Support often comes in a variety of formats, ranging from reliance on academic studies, application of market data supporting such discounts, as well as more quantitative methods.

In furtherance of mitigating risk, it’s imperative to have the appraisal completed by a qualified appraiser. Ensure that you choose a qualified appraiser that satisfies all these requirements as stated in the Treasury Regulations (Treasury Regulation Section 301.6501(c)-1(f)(3)):

A certified valuation firm that is familiar with these types of transactions is your best option.  Getting this valuation done as soon as possible and have it included with any filings will begin the three-year timeline.

You should consult your tax and legal advisors prior to implementing any estate planning transactions.

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How can Quantive Help?

We routinely perform business valuations for estate planning and probate manners.  Our work ranges from operating companies to FLP’s, Limited Partnerships, GRAT’s, and various estate planning vehicles.  Get in touch to learn more.  

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Business Valuation Purposes

BUY-SELL AGREEMENTS

Quantive performs business valuations in support of buy-sell agreements, to include buy-ins and -outs, as well as shareholder disputes.

VALUATIONS FOR DIVORCE

We perform business valuations in support of divorce proceedings, working either jointly retained or on behalf of one spouse.

PURCHASE AND SALE

Smart entrepreneurs routinely retain Quantive to understand price early and gain a roadmap for impending price negotiations.

LITIGATION SUPPORT

We provide litigation support for shareholder disputes, lost profits, shareholder oppression, commercial litigation, and various other reasons.

ESTATE AND GIFT

We perform valuations in support of various gifting strategies, as well as in support of probate requirements.

SBA LOANS

Quantive is qualified to perform valuations in support of SBA financing. Our reports are compliant with all SBA SOP’s.

INSURANCE

Quantive values companies for a variety of reasons related to insurance to include establishing values for funding buy-sell agreements.

OTHER

We perform valuations for business planning, gap analysis, lost profits and damages, and a variety of other reasons.

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