Texas Estate Tax Appraisals – Partial Interests Valued
Strategic Estate Tax Planning
At O’Connor, we specialize in estate appraisals that align with strategic planning to minimize taxes. Utilizing tools like trusts, family limited partnerships (FLPs), and gifting strategies, we help clients reduce their tax liabilities to enable their heirs to get the biggest share possible. A particularly effective strategy is the valuation of partial interests or fractional shares.
Understanding Partial Interest Valuation
A partial interest refers to ownership of a portion of a property, partnership, corporation, LLC, or LLP. This can be in the form of:
- Tenants in Common (TIC)
- Limited Partnerships (LP)
- Limited Liability Companies (LLC)
- General Partnerships (GP)
Evaluation involves determining the fair market value of the entire entity and then deploying the correct reductions to represent the lack of control and saleability.
The Valuation Process
Step 1: Determine the Total Value of the Entity
Begin by determining the fair market value of the entire property. This comprehensive assessment considers all assets and liabilities associated with the entity.
Step 2: Calculate the Proportionate Share
Divide the value up by the parties involved, ensuring they are correctly proportionate. For example, if an entity is valued at $1,000,000 and an individual owns 25%, their share is $250,000.
Step 3: Apply Discounts
Add appropriate discounts to account for the lack of influence and ability to sell associated with partial interests. These typically range from 15% to 50%, depending on factors such as ownership structure, entity type, and market conditions.
Step 4: Determine the Final Value
Subtract the applied discounts from the proportionate share to determine the final value. This adjusted value is crucial for estate tax reporting and planning. This is the most difficult part of the process and requires advanced knowledge to achieve.
Why Fractional Shares Are Valued Less
Illiquidity
They are often illiquid, meaning they cannot be easily sold or transferred. Many entities require approval from other owners before a transfer can occur, limiting the marketability of these interests.
Lack of Influence
Owners typically have limited control over the entity’s operations and decision-making processes, which reduces the value of the share.
Strategic Applications in Estate Planning
Family Limited Partnerships (FLPs)
These allow families to pool assets and transfer ownership interests to heirs while maintaining control. Utilizing FLPs can lead to significant estate tax savings.
Gifting Strategies
Gifting partial interests to heirs can reduce the taxable value, leveraging discounts to minimize applicable taxes.
Trusts
Transferring assets into trusts can provide control over asset distribution and potential tax benefits.
Estate Tax Appraisal FAQs
The term refers to owning a portion of a property or entity, such as a share in a partnership or LLC. These interests are often valued less than full ownership, since the party cannot sell or transfer the home without the consent of others.
Discounts are calculated based on factors such as the ownership structure, entity type, and market conditions. Professional appraisers apply these discounts to reflect the reduced value of partial interests.
Yes, by accurately valuing partial interests and applying appropriate discounts, the overall value of the estate can be reduced, leading to lower tax liabilities.
Yes, when conducted by qualified appraisers following established guidelines, partial interest valuations are accepted by the IRS for estate tax purposes.
O’Connor specializes in estate tax appraisals of all stripes, and we know the best way to deploy every strategy. Our team provides accurate and IRS-compliant techniques to support your estate planning needs.
