ate last year and the beginning of this year, I cautioned if there wasn’t improved quality control of business appraisals for gift and estate tax purposes, the U.S. Treasury would do what they did decades ago when Family Limited Partnerships were abused by enacting IRC Chapter 14. They’d codify changes that ignore market realities that value is impacted by family owned assets and businesses. Simply put, the investor concessions (‘discounts’) would be reduced or all-together disallowed. So, driving down a $15 million net worth family to $10.9 million based upon the impairments associated with a family member holding an illiquid equity stake means taxes on the $4.1 million, which could mean and extra $1 million-plus. And it goes up from there. The hardest hit will be families with wealth of $20 million and above.
It’s 2012/2013 all over again. There was concern that the lifetime exclusion would roll back to pre-Bush levels of $1 million. Instead, this year with portability, a family can exclude $10.9 million from taxes. That stills leaves 100,000+ individuals with businesses and real property worth north of the lifetime exclusion. So, while the bonus of the 11-fold increase in tax savings occurs on the one hand to expect that discounts (especially those that are poorly supported) wouldn’t be curtailed is foolish at best. Read the Wall Street Journal article here.
So, once again, we’ll have a crazy rush of gifting done before the proposed changes go into effect (and the outsized audits that follow for larger estates and poorly crafted appraisal reports). Finally, it’s an election year and some proposals would return to the $3.5 million estate tax exclusion level of 2009 coupled with a $1 million gift with a 45% tax rate. Add the possibility of the reduction or elimination of the above discounts and this means more advanced estate planning with consideration of liquidity, life-insurance and philanthropic options like at no other time during my 25-years focusing on tax, transfer, transition and trouble issues.
Because the 12 Things to Know When Selecting A Business Appraiser we shared last week was so well received, it is provided below. Next email we’ll provide a link to the IRS’ manual for challenging discounts.
12 Things You Should Know Before Retaining An Appraiser
1. Is business appraisal the practitioner’s full-time profession? (Many are CPAs and Investment Bankers performing 5 or fewer reports per annum).
2. How many business appraisals has the practitioner performed and years performing this work? (Should exceed 20 per annum and 5+ years of practice.)
3. How many annual hours of continuing business appraisal education does the practitioner have? (Even better, how often does appraiser present and write on topic.)
4. Is the appraiser willing to provide a sample report so client can make an informed decision? (Would you buy a car, house or business without verification?)
5. How many times has the appraiser defended his appraisal? (Nothing sharpens work product than having it challenged and found well-supported.)
6. What is the appraiser’s annual investment in data? (In order to have mastery of industry and market, the investment commonly exceeds $40,000 per annum)
7. Will the appraiser provide a not to exceed fee quote and a guaranteed completion date? (Also, what is appraiser’s guarantee in defending the opined value.)
8. The hourly rate is not the best measure of quality of product. (If it takes 20 hours at $600 an hour or 40 hours at $400 an hour, which is “better”?)
9. How much time and resources allocated to identifying and measuring risk? (Most reports provide a paragraph; yet, pages are needed as risk is central to value.)
10. How much time and intellectual rigor in measuring the impairments (“discounts” or investor concessions) associated with a non-controlling interest and illiquidity?
11. Does the appraiser provide advisory services beyond appraisal work product? (Company value is about managing risk, not simply revenue and profit growth.)
12. What is the appraiser’s ability to capture and articulate intangible asset values? (If appraiser cannot test assumptions with sanity check, value is suspect.)
Click here to read Carl's 2013 peer reviewed article, Raising the Bar.