Litigation + Valuation Perspectives

Demystifying Valuation, Economic Damages + Forensic Accounting

Recession Provides Unprecedented Opportunities: Tax and Estate Planning

The dramatic declines in the values of real estate and marketable securities provide unique opportunities for your clients, with your planning assistance, to reduce the value of their taxable estate.

In this illustration, the financial and real estate crisis enabled a father to increase his gifts of limited partnership interests to his two children by more than 82% while avoiding the payment of gift taxes.

Gifting in a Bull Market

In 2006, Mr. Smith retained me to value his non-controlling, nonmarketable limited partnership (LP) interest in the Smith Family Limited Partnership (FLP).  Smith wished to gift no more than the 2006 annual gift tax exclusion of $12,000.

At the time, Smith held a 1% general partnership interest and a 59% LP interest.  His two children each owned a 20% LP interest.

The FLP’s sole assets were 3,750 shares of Goldman Sachs (GS) and an unencumbered 400-acre parcel of undeveloped land in Buckeye, AZ.

• I appraised the 400 acres at $1.25 million as of December 31, 2006.
• The market value of the GS stock was $750,000 as of December 31, 2006.

I applied a blended control and marketability discount of 35% to Smith’s LP interest and rendered a value conclusion of $767,000 for the subject 59% LP interest, or $13,000 per 1% interest.

As a result, Smith was able to transfer a 0.92% LP interest to each child.  He would then own a 57.16% LP interest subsequent to the gifts.

Gifting in a Bear Market

In late 2008, during a recession, Smith again retained RBVS to value his 57.16% LP interest in the FLP.  As in 2006, he wished to gift no more than the $12,000 annual gift tax exclusion.

• I appraised the 400 acres at $750,000 as of December 31, 2008.
• The market value of the GS stock was $350,000 as of December 31, 2008.

I again applied a blended control and marketability discount of 35% to Mr. Smith’s LP interest and rendered a value conclusion of $408,694 for the subject 57.16% LP interest, or $7,150 per 1% interest.
As a result, Mr. Smith was able to transfer a 1.68% LP interest to each child.

This example illustrates that the 45% decrease in value of assets held by a family limited partnership between 2006 and 2008 enabled Smith to increase the size of his tax-free annual gift to the children by 82% and to transfer assets and the future growth of those assets from his estate.

Tax Savings

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This article is not intended to be used by any taxpayer or advisor to a taxpayer for the purpose of avoiding penalties that may be imposed upon the taxpayer or advisor by the IRS.  Further, this article is not to be construed as legal advice.

By Gary Ringel, CGREA