ABA Business Valuation Services: Taxation
Gifting and Estate Planning / Settlement
Succession planning and family wealth transfer are major issues for the World War II generation and their "baby boomer" children. When it is time to transfer ownership interests to loved ones, it is important to minimize the tax impact, while also addressing the emotional issues attendant to a generational transition. Careful process must be followed to manage the tax impact and reduce the possibility of successful IRS challenges. We provide thorough, comprehensive appraisal reports which determine, substantiate and defend our value conclusions.
Creating and Updating Shareholder Agreements
Creating Agreements
It is essential to address critical valuation issues at the inception
of a business. Every business with multiple owners should have an
agreement that defines what happens when shareholders die, become
disabled, depart the business, or disagree. ABA professionals can
help you and your attorney define the terms of such agreements and
review them to adjust for changes in your business.
Examples of issues that need clarification include, but are not limited to, the following:
- How to value a minority interest.
- How financial statements will be referenced (month- or year-end, number of years) and whether they will be averaged or weighted.
- Whether book value represents unadjusted balance sheet values or market values.
- Whether to use book value or market value for real estate, marketable securities, or other assets acquired by the business.
- Agreeing on the definition of “assets” as tangible or intangible assets.
- How earnings will be referenced, either as shown on the income statement or adjusted earnings that are managed to minimize taxable income.
Updating Agreements
Businesses change over time. You should review your existing shareholder
or buy-sell agreement at least annually and consider these questions:
- Does the agreement still seem appropriate and fair?
- Will its stipulation for finding value produce a reasonable and fair outcome for the shareholders?
- Will it produce a value which can reasonably be expected to be accepted by the IRS for gift or estate tax purposes?
- Have separate entities been formed to own and lease assets such as buildings, equipment or other items to the corporation?
- If your agreement's stipulations regarding value are unclear, contact an ABA professional to discuss a valuation and to work with your attorney to amend your agreement.
Family Limited Partnerships (FLPs) and Limited Liability Companies
These legal entities allow senior family members to transfer ownership and control of business or investment assets to younger generations through a series of gifts of minority interests. Although they have been gaining favor, this estate planning alternative has come under increasing legal attack from the Internal Revenue Service.
ABA Professionals have prepared hundreds of such appraisals for this and other tax-related uses and have successfully answered challenges from the IRS. Our approach to these valuations includes these steps:
- Develop appraisal reports which properly support the value-driving decisions and the size of all discounts taken.
- Prepare appraisals only for gifting of the FLP interest, as of the date on which gifting took place. (Valuations for different purposes, even as of the same date, can legitimately be substantially different because they have different assumptions).
- Support the size of the appropriate discount based on a reasonable assessment of the facts and circumstances.
Charitable Contributions
The IRS requires that values of charitable donations of illiquid assets such as interests in private businesses or family investment entities be substantiated by independent, qualified appraisers. ABA professionals have prepared hundreds of such appraisals for this and other tax-related uses and have successfully answered challenges from the IRS. Our approach to these valuations includes these steps:
- Develop appraisal reports which properly support the value-driving decisions and the size of all discounts taken.
- Prepare appraisals as of the date on which the donation was made (valuations for different purposes, even as of the same date, can legitimately be substantially different because they have different assumptions).
- Support the size of the appropriate discount based on a reasonable assessment of the facts and circumstances.
Stock Options
Although the desirability of stock options has declined due to recent accounting rule changes that require expensing of option grants and slower growth in stock prices, in some cases, stock options are a useful incentive compensation vehicle. The valuation of stock options requires the application of advanced mathematical models, in which ABA professionals are well-versed.
