Navigating Gift and Estate Tax Valuation Complexity

Navigating the complexities of valuations for gift and estate tax reporting purposes can be daunting. Assets that are donated to trusts and charities, as well as assets within a decedent’s estate, often include interests in privately held entities. Regulatory compliance requirements, including those set forth by the IRS, stipulate that such interests' Fair Market Value (FMV) must be reported for tax purposes. However, such entities and interests are typically not actively traded on a public market. As a result, estimating the FMV of these types of assets can present unique challenges.

When you need a valuation for gift and estate tax reporting purposes, you need a valuation advisor with the right experience:

• Experience with unique IRS requirements: The IRS has set forth a framework that has a number of specific requirements around approach and reporting that must be met when valuing a closely held business interest. These requirements are of the utmost importance and must be present in every gift and estate tax valuation report. Opportune’s valuation professionals have extensive experience with these reporting requirements.
• Experience with various industries: Opportune’s valuation professionals have vast experience valuing businesses and assets in various industries. Closely held businesses in different industries have unique valuation nuances and informational requirements. For example, the valuation of interests in the upstream oil and gas industry may require the preparation of a reserve report to capture the expected future cash flows from this interest appropriately. Opportune’s in-house reserve engineering group can assist in preparing such reserve reports.
• Experience with various valuation approaches: Valuations for gift and estate tax reporting purposes that are suitable and defensible consider a combination of some or all of the three recognized valuation approaches and appropriate valuation discounts where appropriate.

Gift and Estate Tax Valuation Fundamentals

Valuations for gift and estate tax purposes are crucial for wealth transfer and tax compliance.

• Accurate valuations underpin overall financial planning. Supportable FMV analyses are crucial in ensuring and facilitating a seamless transfer of wealth.
• Compliance is non-negotiable in asset transfers. Compliance with gift and estate tax regulations is a key focus of IRS scrutiny. With constant changes in gift and estate tax law, including upcoming changes to lifetime exemption amounts, having a well-defended valuation plays a key role in ensuring compliance.
• FMV analyses are multifaceted and complex. Determining FMV is a sophisticated exercise, factoring diverse elements such as market conditions, industry fundamentals, specific business or asset characteristics, and potential income streams.

Robust FMV analyses should consider some or all of the three widely recognized valuation approaches, where appropriate:

• The income approach, which considers cash flow projections for the business or interest in question.
• The market approach, which considers trading multiples of guideline publicly-traded companies and/or multiples of guideline industry transactions.
• The cost approach, which considers asset reproduction costs and/or replacement costs for tangible assets.

Appropriate valuation discounts for factors such as lack of control and/or marketability should also be considered. Such discounts should be adequately supported and documented.

Experience ensures defensible and reasoned valuations. Our professionally documented appraisals offer the robust support necessary in cases of IRS audits or beneficiary disputes.

Trust & Philanthropic Giving Strategies

Strategic philanthropy through trusts requires comprehensive valuations to align generosity with financial savvy. Precise assessments enhance tax-effective contributions and the donor's legacy. Understanding valuation discounts and lifetime exemption amounts optimizes philanthropic impact.

• Charitable Contribution Deductions: Accurate valuation of donated assets is crucial for tax deduction eligibility. Qualified appraisals support auditable claims and mitigate risks of disallowed deductions.
• Succession Planning Valuations: Valuation is crucial for succession planning, tax management, and equitable distribution. Each asset needs an accurate valuation for fair allocation among heirs and/or donees. Specialized expertise is necessary to navigate complexities and to consider valuation discounts.