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Estate & Gift Tax Valuation

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Investors and shareholders of venture-backed companies have always been concerned about their transfer of wealth in a tax-friendly manner. Since the onus lies with the taxpayers to prove the valuation analysis utilized for the calculation of estate and gift taxes liability, the taxpayer’s community is more careful to engage with these affairs. The primary premise for the testification covered the assumption that all/any of these wealth transfers should not happen at any value lesser than fair market value as defined by the Internal Revenue Service (“IRS”) codes and regulations. Subsequently, all of these value conclusions should be well-backed by third-party valuation reports which should be further based on the appropriate valuation techniques and reasonable valuation assumptions. 

A fully-documented analysis based on reasonable methods, reasonably applied, helps to

  1. establish the lifetime value of gifts, as well as commence the statute of limitations on certain non-cash transfers, and

  2. mitigate the risk of an audit and the possibility of underpayment penalties if the report does not stand up to IRS standards. Our qualified appraisals render a fair market value opinion that complies with IRS standards, including Revenue Ruling 59-60.

Build Back Better Act (“BBBA”) is enacted to increase and rationalize taxes on high net-worth individuals who intend to transfer wealth, close the necessary tax evasion techniques by closing loopholes and give the Internal Revenue Service more resources to enforce the tax laws.  It is expected to curb certain common gift and estate tax benefits mechanisms, either to make these evasion techniques obsolete or very limited in nature.

Under the BBBA, grantor trusts may no longer be excluded from the taxable estate of the grantor, and sales between an individual and their own grantor trust would be taxable for income tax purposes. These provisions are proposed to be effective only with respect to trusts created after the enactment of the BBBA (or contributions made after the date of enactment to pre-enactment trusts).  Consequently, a taxpayer who wants to explore these options should plan to have his or her trust fully created and funded by the end of 2021.

On September 15, 2021, the House Ways and Means Committee approved the legislative tax provisions of the BBBA. The bill must still meet with additional committee approval before it can move to the U.S. House of Representatives at large, and then to the U.S. Senate before potentially being signed into law.

The BBBA proposes to reduce the federal estate and gift tax exemption from the current $11.7 million per individual to $5.0 million per individual (indexed for inflation). As currently proposed, this provision would be effective as of January 1, 2022, and is not expected to be applied retroactively to gifts made in 2021. In addition, the Internal Revenue Service previously confirmed that there will be no “clawback” if a person utilizes the exemption when it is high but dies after the exemption has been reduced.   As the reduced exemption amount is not expected to apply to gifts made in 2021, there is a window for possible estate tax planning through the end of this year. 

Under the current tax law of estate and gift, a certain type of trust (known as a “grantor trust”) allows for the individual funding the trust (the “grantor”) to enjoy income tax benefits with respect to transactions between the grantor and the trust without causing the trust assets to be includible in the grantor’s estate. For transfers of interests in a closely held entity, the BBBA is expected to eliminate

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