quickreadbuzz.com Open in urlscan Pro
69.16.236.126 Public Scan

Back to summary

Submitted URL:
https://url.us.m.mimecastprotect.com/s/YhIgC73wVmt810BLiBxg0T?domain=quickreadbuzz.com
Effective URL:
https://quickreadbuzz.com/2024/05/01/business-valuation-nataliya-kalava-essential-guide-to-gift-tax-and-estate-planning/
Submission: On May 10 via api (May 10th 2024, 7:33:45 pm UTC) from US — Scanned from US

Form analysis
1 forms found in the DOM

GET https://quickreadbuzz.com

<form method="get" action="https://quickreadbuzz.com">
  <input type="submit" class="sb" value="Search">
  <input type="text" class="sf" value="Search here ..." name="s" onfocus="if(this.value == 'Search here ...') {this.value = '';}" onblur="if (this.value == '') {this.value = 'Search here ...';}">
</form>

Text Content

* Home
* Top Stories
* Featured Articles
* Valuation/Appraisal
* Case Law
* Exit Planning
* Financial Forensics
* Forensic Accounting
* Healthcare
* Litigation Consulting
* M & A and Exit Planning
* Practice Management
* Tax—Gift & Estate
* About
* Get Published
* Archive
* Subscribe to Newsletter
* Earn CPE

Go To... Home Top Stories Featured Articles Valuation/Appraisal Case
Law Exit Planning Financial Forensics Forensic
Accounting Healthcare Litigation Consulting M & A and Exit
Planning Practice Management Tax—Gift & EstateAbout Get
PublishedArchiveSubscribe to NewsletterEarn CPE
* LinkedIn
* youtube

* Home
* Top Stories
* Valuation/Appraisal
* Case Law
* Expert Witness
* Financial Forensics
* Forensic Accounting
* Healthcare
* Litigation Consulting
* M & A and Exit Planning
* Practice Management
* Tax—Gift & Estate
* Archive
* Earn CPE
* Get Published
* About
* Contact
* Resources

Go To... HomeTop Stories Valuation/Appraisal Case Law Expert
Witness Financial Forensics Forensic
Accounting Healthcare Litigation Consulting M & A and Exit
Planning Practice Management Tax—Gift & EstateArchiveEarn CPEGet
PublishedAboutContactResources
Essential Guide to Gift Tax and Estate Planning Reviewed by Momizat on May 01.
Consider the SLAT and GRAT in Gift Planning Understanding gift tax regulations
is crucial for individuals and their advisors because it impacts estate planning
Consider the SLAT and GRAT in Gift Planning Understanding gift tax regulations
is crucial for individuals and their advisors because it impacts estate planning
Rating: 0
You Are Here: Home » Estate Planning » Essential Guide to Gift Tax and Estate
Planning

ESSENTIAL GUIDE TO GIFT TAX AND ESTATE PLANNING

Posted date: May 01, 2024 In: Estate Planning, QuickRead Top Story,
Valuation/Appraisal

CONSIDER THE SLAT AND GRAT IN GIFT PLANNING

Understanding gift tax regulations is crucial for individuals and their advisors
because it impacts estate planning strategies and can significantly affect the
overall tax liability. Properly utilizing exemptions and understanding the rules
surrounding gift taxation can help individuals minimize their tax burden and
ensure a smooth transfer of assets to their intended beneficiaries. This article
discusses the availability of the SLAT and GRAT gifting techniques.

The concept of gift and estate taxes dates as far back as 700 B.C., and research
suggests that Egypt implemented a 10% tax on property transfers upon death.
Similarly, in the first century A.D., Augustus Caesar levied a tax on
inheritances and bequests, excluding only immediate family members.[1] During
the Middle Ages, transfer taxes emerged due to the belief that all assets
belonged to the sovereign or the state. In the United States, the taxation of
assets upon death can be traced back to the Stamp Act of 1797. Although the
initial Stamp Act, notably targeting tea, contributed to the Revolutionary War,
its subsequent implementation had a less pronounced effect. Revenues raised from
requiring a federal stamp on probate wills were used to settle debts incurred
during the undeclared naval conflict with France in 1794. Congress repealed the
Stamp Act in 1802.[2] In the United States, the taxation of decedents’ estates
has been in effect since 1916. The gift tax was initially introduced in 1924,
abolished in 1926, and then reinstated in 1932 with the aim to curb estate tax
avoidance by preventing donors from transferring their wealth (assets) before
death to avoid estate taxes.

The IRS defines the gift tax as a “tax on the transfer of property by one
individual to another while receiving nothing, or less than full value, in
return. The tax applies whether or not the donor intends the transfer to be a
gift. The gift tax applies to the transfer by gift of any type of property. An
individual makes a gift if they give property (including money) or the use of or
income from property without expecting to receive something of at least equal
value in return. If an individual sells something at less than its full value or
if they make an interest-free or reduced-interest loan, they may be making a
gift. [3]”

The estate tax pertains to a tax on an individual’s right to transfer their
property upon death. This encompasses all possessions and assets an individual
owns at the time of their passing, such as cash, jewelry, business holdings,
real estate, investments, annuities, and more, collectively constituting their
“Gross Estate.” It is essential to note that all assets must be documented at
their fair market value, which is determined as per Section 20.2031-1(b) of the
Estate Tax Regulations and Section 25.2512-1 of the Gift Tax Regulations. Fair
market value is defined as:

“[T]he price at which property would change hands between a willing buyer and a
willing seller, neither being under any compulsion to buy or sell and both
having reasonable knowledge of the relevant facts.[4]”

Once the Gross Estate is accounted for, certain deductions are allowable to
arrive at “Taxable Estate.” According to the IRS, “these deductions may include
mortgages and other debts, estate administration expenses, property that passes
to surviving spouses and qualified charities. The value of some operating
business interests or farms may be reduced for estates that qualify.[5]”

The total value of gifts made during the individual’s lifetime that are subject
to gift tax (beginning from the year 1977) is included in the calculation of the
Taxable Estate. From this Taxable Estate value, the estate tax owed is
calculated based on the prevailing estate tax rates. Should the aggregate value
of the deceased individual’s Gross Estate (factoring in taxable gifts and
specific gift tax exemptions) surpass the threshold established by tax
regulations for the year of their passing, an estate tax return is mandatory
with the IRS. Presented next is a table illustrating the filing thresholds for
the year of death (for an individual).

Year of Death

If Amount Described Above Exceeds:

2017

$5,490,000

2018

$11,180,000

2019

$11,400,000

2020

$11,580,000

2021

$11,700,000

2022

$12,060,000

2023

$12,920,000

2024

$13,610,000

Hence, when an individual opts to give a monetary sum, a vehicle, or a
property/asset, it is not without implications, and the IRS requires disclosure
if the value of the gift exceeds $17,000 in 2023 (or $34,000 if jointly gifted
with a spouse). In 2024, these thresholds increase to $18,000 individually or
$36,000 with a spouse. An essential facet of gift taxation is the lifetime gift
tax exemption. Should the gift surpass the yearly limit, the surplus is offset
against the lifetime gift tax exemption. Presently, the exemption stands at
$12.92 million per donor in 2023, applicable to both gift and estate taxes.
However, this exemption is temporary and only applies through 2025. Absent
Congressional alterations, post-2025, the exemption is slated to revert to $5.49
million, adjusted for inflation. For individuals and families with assets
surpassing $12.92 million, various strategies are available to capitalize on the
current gift tax exemption before its sunset in 2025, which potentially subjects
a substantial portion of assets to be taxed at a 40% tax rate.

Qualified attorneys can assist in identifying the most suitable approach for
wealth transfer and navigating specific family circumstances and asset
allocations. For example, among the tools available, two noteworthy options
include the Spousal Lifetime Access Trust (SLAT) and the Grantor Retained
Annuity Trust (GRAT).

* A SLAT is an irrevocable trust created by one spouse for the benefit of the
other spouse and possibly other family members, such as children or
grandchildren. The spouse who creates the trust (the grantor) transfers
assets into the trust, removing them from their taxable estate. The trust
allows the non-grantor spouse to access the trust assets during their
lifetime, providing financial security. Upon the death of the non-grantor
spouse, any remaining assets in the trust pass to the designated
beneficiaries, such as children, free from estate taxes.
* A GRAT is an irrevocable trust established by a grantor to transfer assets to
beneficiaries while retaining an annuity payment for a specified period. The
grantor transfers assets into the trust and retains the right to receive
annual annuity payments from the trust for a predetermined period. At the end
of the trust term, any remaining assets in the trust pass to the designated
beneficiaries, typically free from gift or estate taxes. If the assets
appreciate at a rate higher than the IRS’s assumed rate (the Section 7520
rate), the excess appreciation passes to the beneficiaries tax-free.

Business valuation plays a crucial role in determining the value of assets
transferred into these trusts, and effective estate tax planning ensures that
assets are transferred in a tax-efficient manner to achieve the desired
financial objectives.

Business valuations intended for gift and estate tax purposes must conform to
the relevant guidelines outlined in the Internal Revenue Code (“Code”) and
Treasury regulations. Within the domain of estate and gift taxation, the
prescribed benchmark for valuation is fair market value, as previously defined.
Business valuations performed for federal gift and estate tax purposes must
consider and follow the factors listed in Internal Revenue Service Revenue
Ruling 59-60. This revenue ruling states that the following eight factors are
fundamental and should be considered in each case:

Three traditional valuation approaches can be used to establish the fair market
value of a business: (i) income approach, (ii) market approach, and (iii) net
asset (or cost) approach. Within these three basic approaches, several methods
may be used to estimate value. An overview of these approaches and their
corresponding methodologies follows.

Income Approach

The income approach is a methodology utilized to ascertain the value of an
investment, such as a business, ownership interest, security, or intangible
asset. It employs one or more techniques to translate the anticipated future
economic benefit associated with the investment into a singular “present value”
figure. According to IRS Revenue Ruling 59-60, valuation analysts are advised to
factor in the business’s earning potential when determining fair market value.
This approach relies on the following two techniques: capitalization and
discounting. The present value of future benefits is established by applying a
discount rate, which accounts for the time value of money, pertinent investment
attributes, the perceived level of risk in the market, and the subject
investment.

* The capitalization of earnings method is an income approach that determines
the value of a business by assessing future projected earnings generated by
the company. These anticipated earnings are then capitalized using an
appropriate capitalization rate. This method assumes that all tangible and
intangible assets are integral components of the business and does not
endeavor to differentiate between the values of each. It is commonly employed
to appraise operational businesses or entities with low capital intensity,
such as service or professional organizations. Moreover, if historical
earnings have exhibited stability and are anticipated to remain constant or
grow at a foreseeable rate, the capitalization of earnings method is
typically employed to derive an indication of value.
* The discounted cash flow method, under the income approach, operates on the
principle that the assessed worth of a business equals the present value of
its projected future earnings, along with the present value of the company’s
terminal value. This is a multi-period valuation technique. This methodology
proves applicable in scenarios where future earnings are anticipated to
undergo substantial year-to-year fluctuations and where such variations are
reasonably foreseeable.

Market Approach

The market approach is a valuation methodology grounded on the principle of
substitution. Its fundamental premise involves examining companies within the
same industry as the subject company to offer valuation benchmarks. Comparisons
are drawn between the subject company and similar companies whose stocks are
actively traded on the exchange or over the counter (e.g., NYSE, NASDAQ, etc.).
Valuation multiples for such companies are computed and scrutinized. A valuation
multiple is derived by dividing the price of the guideline company’s stock as of
the valuation date by a relevant economic variable observed or calculated from
the guideline company’s financial statements.

Furthermore, it is crucial to consider valuation multiples indicated in
comparable merger and acquisition transactions. Transactional data can furnish
robust indications of value in company appraisals when employed diligently and
meticulously. Additionally, it is imperative to consider any previous
transactions involving the subject company’s capital stock.

* The guideline public company method, a market-driven approach, operates under
the premise that pricing multiples (i.e., the relationship between the price
of publicly traded stocks and various other factors such as earnings, sales,
book value, etc.) of publicly traded companies can serve as an indicator of
value for closely held appraisal subjects. By making necessary adjustments,
these pricing multiples can be applied to similar factors of the appraisal
subject to determine an estimated value for the subject company. For
instance, a price-to-earnings multiple would be applied to the company’s
earnings, while a price-to-EBITDA (earnings before interest, taxes,
depreciation, and amortization) multiple would be applied to the company’s
EBITDA, and so forth.
* The guideline merged and acquired (transaction) company method is a
market-based approach. This appraisal methodology is based on the premise
that pricing multiples can be used as an indicator of value to be applied in
valuing a closely held appraisal subject. GMAC entails estimating a company’s
value by referencing the market values of comparable companies that have
undergone mergers or acquisitions previously. From these transactions,
multiples are derived, which can then be applied to the corresponding
financial metrics of the specific business undergoing appraisal.

Asset Approach

The asset-based approach, often referred to as the cost approach, determines the
fair market value by adjusting the asset and liability balances of the company
to their fair market value equivalents. This method relies on identifying,
valuing, and totaling the tangible and intangible assets of the company.

* The adjusted net asset value method represents an asset (cost) approach to
valuation, whereby the business’s worth is determined as the difference
between the fair market value of its assets and liabilities. This strategy
proves effective for assessing the value of a non-operating enterprise, such
as a real estate holding company, an investment holding company, an
asset-heavy business, or a business experiencing ongoing losses or slated for
liquidation.
* The excess earnings method (hybrid method) is a valuation approach that
integrates both income and asset considerations, wherein the adjusted net
tangible and intangible assets of the business entity are assessed
separately. These constituent assets are subsequently amalgamated to
ascertain the total fair market value of the business. When relying on the
excess earnings method, intangible assets are appraised by capitalizing the
surplus earnings of the business, which denotes the earnings exceeding those
necessary to yield a reasonable rate of return on the adjusted net tangible
assets of the business. It is worth noting that the IRS and the Tax Court
view this method as a last resort, to be employed only when implementing
other methodologies would not be appropriate.

For a considerable time, courts have consistently supported a widely
acknowledged principle, often echoed in professional assessments: that the worth
of closely held business interests typically falls short of the value of a
comparable publicly traded company where an investor can convert his or her
investment to cash within a few business days. For a closely held business,
there is the challenge of swiftly converting the property into cash at a minimal
cost, which is referred to as lack of marketability. Furthermore, if the
interest being valued is less than a majority or control stake and cannot
influence managerial decisions and other facets of the entity, this is referred
to as a lack of control. Thus, in valuing minority, non-marketable interest, it
may be appropriate to consider and apply a discount for lack of control (DLOC)
and/or discount for lack of marketability (DLOM).

When assessing the value of a non-controlling (minority) ownership stake in a
company, it is important to differentiate between the value of such a
non-controlling interest, which lacks the ability to exert control over the
business, and the value of an actual controlling interest. Essentially, the
collective value of partial interests may not equate to the value of the entity
as a whole. A complete business entity holds a distinct value due to its
conveyance of various rights. Holders of non-controlling interests face
limitations and are at a relative disadvantage in influencing management
decisions due to their lack of absolute voting power. Since management possesses
control over fund allocation, it can significantly influence the profitability
and overall operations of the company.

Numerous studies have explored the premiums paid in the acquisition of public
companies. One notable source is the Mergerstat Control Premium Study, conducted
by Mergerstat, a subsidiary of BVR. This study furnishes data on control
premiums across diverse industries and market conditions (updated annually)
covering a substantial portion of the M&A market in the United States and
abroad. Financial professionals, including investment bankers, corporate finance
specialists, and valuation experts, widely utilize data from the Mergerstat
Control Premium Study as a reference point for control premium analysis in M&A
transactions and to calculate the corresponding DLOC. The DLOC represents the
reduction in value associated with owning a minority interest rather than a
controlling interest in a company. A DLOC is calculated as the inverse of the
selected control premium (as provided by Mergerstat transactions) as follows:
Discount for Lack of Control = 1 – (1 / (1 + Control Premium)).

Marketability is defined in the International Glossary of Business Valuation
Terms as “the ability to convert property into cash at minimal cost.” A DLOM is
described as “an amount or percentage subtracted from the value of an ownership
interest to account for the relative absence of marketability.” Consequently, a
DLOM is typically applicable when there is no readily available market for the
interest under consideration, which is often the case for most small businesses.
It is relatively straightforward, quick, and inexpensive to convert publicly
traded securities into cash at the owner’s discretion. Generally, publicly
traded common stocks can be sold immediately, with cash settlement occurring
within two to three business days. IRS Revenue Ruling 77-287 acknowledges the
lack of marketability for privately held business interests:

“Whether the shares are privately held or publicly traded affects the worth of
the shares to the holder. Securities traded on a public market generally are
worth more to investors than those that are not traded on a public market.”

A closely held entity lacks the marketability of publicly traded entities.
Therefore, an ownership interest in a business is more valuable if it is easily
marketable or, conversely, less valuable if it is not. When a prospective seller
seeks a willing buyer, they face significant risks due to fluctuating market
conditions, the time required to finalize the transaction, or changes in the
financial needs of the subject company.

The quantification of the DLOM has been the focus of numerous studies, including
those analyzing restricted shares of publicly traded company stock and closely
held company stock before an initial public offering (IPO). These studies
compare the same company’s shares in a marketable state to a non-marketable
state. Articles and studies discussing DLOM (based on corporate stock) indicate
that the discount’s magnitude depends on various factors, including dividend or
distribution size, sale restrictions, future IPO or sale prospects, the
existence of buy-back agreements or put options, earnings level, volatility,
potential buyer pool, issuer size and financial strength, and minority interest
holders’ access to information and reliability.

The courts and the financial reporting sector have recently leaned towards
quantifying DLOM. A synthetic put option model is a method used to estimate the
lack of marketability discount in valuing privately held companies or other
illiquid assets. DLOM reflects the asset’s reduced value due to the absence of a
ready market and the associated challenges and costs of selling it.

A put option grants the holder the right, but not the obligation, to sell an
underlying asset at a specified price (strike price) within a predetermined time
frame. The synthetic put option model operates on the notion that an investor
holding an illiquid asset is in a similar position to one holding a put option
on a publicly traded security. Just as a put option enables the holder to sell
the underlying security at a set price, the investor with an illiquid asset has
the right to sell it if a market were available.

According to David Chaffe: “If one holds restricted or non-marketable stock and
purchases an option to sell those shares at a market price, the holder has, in
effect, purchased marketability for those shares. The price of this put is the
discount for lack of marketability.”

In a synthetic put option scenario, the illiquid asset being valued serves as
the underlying asset, and the strike price represents the estimated market value
of the asset. The model’s outcomes can be used to adjust the estimated market
value of the asset to reflect its lack of marketability. However, it is
important to note that DLOM is a subjective estimate and may vary based on the
assumptions and inputs used in the calculation. Like all valuation methods, the
synthetic put option model should be utilized as a tool to gain insight and make
informed decisions rather than as a prediction of the exact DLOM.

In the words of Henry David Thoreau, “Wealth is the ability to fully experience
life.” This sentiment underscores the importance of understanding the
intricacies of gift taxation in the U.S., including the lifetime gift tax
exemption. By grasping these concepts, individuals and their trusted advisors
can confidently navigate estate planning, optimizing their wealth and financial
future while embracing life experiences and opportunities to the fullest and
optimum extent.

[1] The Estate Tax: Ninety Years and Counting, by Darien B. Jacobson, Brian G.
Raub, and Barry W. Johnson, https://www.irs.gov/pub/irs-soi/ninetyestate.pdf.

[2] The Heritage Foundation: Estate Taxes – A historical perspective (2004),
https://www.heritage.org/taxes/report/estate-taxes-historical-perspective.

[3] IRS – Gift Tax:
https://www.irs.gov/businesses/small-businesses-self-employed/gift-tax.

[4] Internal Revenue Service, Treasury, § 20.2031–1,
https://www.govinfo.gov/content/pkg/CFR-2013-title26-vol14/pdf/CFR-2013-title26-vol14-part20-subjectgroup-id210.pdf.

[5] IRS – Estate Tax:
https://www.irs.gov/businesses/small-businesses-self-employed/estate-tax.

--------------------------------------------------------------------------------

Nataliya Kalava, CVA, ABV, MAFF, is an expert in the fields of business
valuation and finance, with about 15 years of experience. She has led and
contributed to numerous valuations for diverse purposes, including gift and
estate tax planning, management planning, M&A transactions, SBA valuations,
financial reporting, and litigation support. Ms. Kalava’s passion lies in
helping business owners navigate ownership transitions, guiding them through
challenges, and uncovering opportunities for growth. Her expertise is honed
through a rich career journey, having worked with renowned organizations such as
Equinix Inc., Humana Inc., BDO LLP, Sigma Valuation Consulting Inc., and PwC.
Ms. Kalava’s dedication to her profession extends to education and community
engagement. She has been an Adjunct Finance faculty member at the University of
Tampa, imparting her knowledge to undergraduate students on corporate finance
and investment. Furthermore, she organizes Continuing Legal Education (CLE)
courses on business valuation topics accredited by the Florida Bar.

Ms. Kalava can be contacted at (813) 999-1144 or by e-mail to
nkalava@one10firm.com.

‹ Previous Next ›

NATIONAL ASSOCIATION OF CERTIFIED VALUATORS AND ANALYSTS

The National Association of Certified Valuators and Analysts (NACVA) supports
the users of business and intangible asset valuation services and financial
forensic services, including damages determinations of all kinds and fraud
detection and prevention, by training and certifying financial professionals in
these disciplines.

Number of Entries : 2549

* DETERMINING THE FAIR MARKET VALUE FOR A NFT

* UNDERSTANDING IPCPL THEORY, EVIDENCE, AND APPLICATION

* THE WELL-WRITTEN BUSINESS VALUATION REPORT

* ECONOMIC OBSOLESCENCE MEASUREMENT BEST PRACTICES

* COMPANY SPECIFIC RISK

* LOOKING BACK TO GO FORWARD

* ANALYST CONSIDERATION OF NEGATIVE INFLUENCES ON S CORPORATION BUSINESS VALUES

NACVA’S ONLINE DIRECTORY

FREE WEEKLY E-MAIL NEWSLETTER

POCKETEXPERTS.SOLUTIONS

quickreadbuzz.com Open in urlscan Pro 69.16.236.126 Public Scan

Form analysis 1 forms found in the DOM

GET https://quickreadbuzz.com

Text Content

quickreadbuzz.com Open in urlscan Pro
69.16.236.126 Public Scan

Form analysis
1 forms found in the DOM