Trusts & Estates Webinar - Poll Results and Final Thoughts

Trusts & Estates Webinar - Poll Results and Final Thoughts

Thanks to all for joining our October 24 webinar “Managing Clients Through Business Valuation Matters.”  We hope it was both helpful and informative.  There were many outstanding questions sent to us during the webinar and we’d like to share comments, poll results and content:

Reminder: If you weren’t able to join live, the webinar Replay is available to view any time right here:
http://www.wealthmanagement.com/webinars/managing-clients-through-business-valuation-matters?partnerref=MPIOD/

Q: What marketability discount do you typically apply to a small business? 

  • “It is always dangerous to generalize about marketability discounts.  Through use of our proprietary data, we find ourselves deriving discounts on closely held business interests most often in the range of 20% to 40%.  Let’s assume the question pertains to a small, closely held corporation that does not provide owners put or redemption rights, and that distributions are made solely for tax purposes.  It is likely that our data will indicate a discount in the higher end of the aforementioned range.” 

Q: What methods can you use to value a pre-revenue company? 

  • “This question likely refers to start-up or early stage companies that have a new technology, drug or business plan that requires funding, testing, and/or proof of concept, all of this not to mention the execution risk.  These valuations often require creativity and enhanced collaboration between the valuation analyst and the management team.  In the case of a pre-revenue company, the trick is assessing market size, time to market, profit potential, and probability of execution simultaneously.  These valuations often take the form of a discounted cash flow model.  Multiple projection scenarios may be developed.  Venture capital rates of return must be derived.  In many cases, recent financing rounds may be the best indication of value.  Even if the required valuation is for a different class of stock than the class of stock sold in the recent financing round, there are techniques that can be used to derive values for all classes of stock in such cases.”

 

We included in the webinar a poll question about the use of formula clauses in gift/sale transactions.  Formula clauses have become a regular part of estate planning transactions, especially after the Wandry case decision was published.  Here’s the results: 


Not surprisingly, at the Southern Federal Tax Institute last week in Atlanta, several speakers noted the following:

  • Avoid “Procter-like” clauses (a reference to the 1944 Procter v. Commissioner case decided by the Fourth Circuit).  These clauses are blatant in their attempt to avoid gift tax, calling for the reversal of that portion of a transfer of units that gives rise to gift tax.  The Fourth Circuit said that such a clause imposed a condition subsequent that violated public policy.
  • Clauses that call for the transfer of any excess units to charity have been accepted by the courts over the years (e.g., McCord, Christiansen, Petter, Hendrix). 
  • IRS continues to be wary of formula clauses, seeing room for abuse by taxpayers.  In light of this, taxpayers should be careful in their use and execution of transactions using formula clauses.  Gift tax returns should be filed timely, transactions should be fully disclosed, and qualified appraisals should be attached.  Transactions should be executed exactly as the transfer agreement stipulates. 

The Bottom Line:  Formula clauses should be thought of as insurance in case a subsequent challenge ends unfavorably to the taxpayer, rather than a license to be aggressive.  So long as transactions are conducted in a manner that is consistent with best practices, formula clauses can be used successfully. 

A significant segment of the webinar included tips on handling IRS estate and gift tax audits.  Here are 5 top tips:

  • Each audit is unique and will likely require time and patience to obtain a favorable result for the taxpayer.
  • Do not make a settlement offer until you fully understand the IRS’ position, rationale and support.  Many advisors are inclined to move to settlement talks too early in the process, which can be counterproductive. 
  • The taxpayer has rights too.  Taxpayers have the right to know who the agent’s manager is, and can request a meeting with the manager if having difficulty communicating with the agent. 
  • Ask for the IRS’ rationale.  Ask for a copy of the engineer’s report if there is an engineer engaged in the case. 
  • Bring the appraiser in for consultation.  Often the appraiser is in a better position to understand the IRS’ valuation positions and rationale, and whether or not they are sensible and relevant to the case at hand.  Appraisers can prepare rebuttal letters to respond to the IRS and strengthen the taxpayer’s position. 
We welcome any additional questions or comments you may have, and thank you for attending last week’s webinar.



About MPI

MPI, a prestigious national consulting firm founded in 1939, specializes in business valuation, forensic accounting, litigation support and corporate advisory work. MPI provides fairness opinions, sell-side and buy-side advisory services through its investment banking affiliate MPI Securities, Inc. MPI conducts every project as if it is going to face the highest level of scrutiny, and its senior professionals have extensive experience presenting and defending work product in front of financial statement auditors, management teams, corporate boards and fiduciaries, the IRS, other government agencies, and in various courts.