O’Connor understands key facets of estate taxes to help clients plan strategically, for the long term. Options to reduce estate taxes include trusts, family limited partnership, gifts prior to death, gifts at death, and skillful use of partial interests.
An important strategy is partial interests – Skillful use of partial interests can dramatically reduce estate taxes. In some cases, tiers of partial interests can reduce estate taxes even further. For example, an entity that owns a series of partial interests can be owned by multiple people. Partial interest valuation values the ownership of a portion of a property, limited partnership, general partnership, corporation, LLC or LLP.
Partial Interest Valuation
Valuing a partial interest involves first valuing the underlying asset and then determining a discount for a partial interest. The valuation of a partial interest involves two separate appraisals. Partial interest valuation is more complex than most valuation problems, and requires intense analysis and seasoned judgment.
Partial Interests are Worth Less
Partial interests are almost always worth less than an undivided interest. This is because they are illiquid and lack control. Partial interests are illiquid since it is difficult to sell a limited interest in a property or nonpublic company. In addition, the sale of a partial interest in many entities is subject to approval by other owners. In many cases, other owners can choose to not allow the sale in their sole discretion without providing a reason.
Limited or Non-Control
The owner of a partial interest has less control than the owner of the entire property or entity. Even if someone owns a controlling interest, their actions are subject to review and scrutiny by the owners of the balance of the property or entity. The owner of a non-controlling interest typically has very limited ability to control decisions or influence the management and policies for a property or entity.
The steps involved in a simple partial interest valuation are as follows:
- Value the entire property or entity
- Calculate the value of the proportionate share in the property or entity (value of the entire property times percentage owned)
- Determine the appropriate discount for the partial interest
- Calculate the value of the proportionate share after the discount for a partial interest