Estate tax: value closely held business
Date: The valuation date is the date of the decedent’s death. An alternate date six months later may be elected but only if it decreases both the estate and the tax. If an alternative date is used, that date will be used for all assets of the estate. The election can be used for a late filed return and is irrevocable. Although date of death or alternative date are used, some post death events can effect valuation, such as post death sales or expectation of board approval which might result in a discount in value.
• Closely held business: Discounts are allowed for minority and marketability. A minority business interest may be worth less than its proportional value. Lack of marketability of the stock can result in a further discount. The same applies to other ownership interests such as an interest in a partnership or LLC. State law ownership requirements for liquidation may also result in a further discount where the decedent’s ownership does not equal the statutory minimum to require liquidation. Valuation of preferred shares utilizes special rules. Generally, value is arrived at by negotiation with the revenue agent on audit after the estate reports the business at the lowest justifiable appraised value. The amount shown on the return is an admission and can only be lowered upon a showing of error. The most important factors in valuation are net worth and prospective earning power. Earnings are more important for an operating company and asset values are more important for an investment company. For operating corporations, the valuation often focuses on good will using formulas. In a stable business, the service will take the average earnings for 5 years reduced by 8% of the average tangible assets, and the difference is capitalized at 15% (8-15 formula). If the business is not stable with regular earnings, the service will use a 10-20 formula. A special 14 year deferral of estate tax payment with a reduced rate of interest may be available where a business is a significant part of the estate.
To make sure that you are protected, it is crucial that you contact skilled and experienced Attorney C. Stephen Gurdin Jr. a Pennsylvania Estate Planning lawyer.
Call Attorney C. Stephen Gurdin Jr. at his Gurdin Law Wilkes-Barre Scranton Pennsylvania area office today, 570.826.0481 toll free 1.800.221.0618.email Stephen@gurdinlaw.com to schedule a free consultation
Regular Office hours 2:30 and 7 p.m. Monday through Friday by appointment. Earlier appointments available upon request