Estate & Gift Tax Valuations

In the estate of a business owner (in closely-held companies), the most valuable asset is usually the ownership interest.

It can be a complex task to determine the true value of the ownership interest for the purposes of estate planning and transfer tax etc. Valuation reports produced for the purposes of the filing estate tax or for a gift are subject to an IRS audit. Such a valuation should be a “qualified appraisal” to meet the IRS requirements.

While determining the valuation, the factors outlined in the Revenue Ruling 59-60 and the Treasury Regulations must be thoroughly considered. What valuation method is chosen by the accountant may depend on the specific circumstances and facts of a case?

But in general, the forensic accountants may follow one of the following valuation approaches: the income approach, asset approach or market approach. Depending on the extent of ownership interest, the forensic accountant may give consideration to various types of issues and discounts, including:

  • Built-in capital gains
  • Key man and non-compete clauses
  • Majority vs. minority ownership
  • Marketability of the ownership interest that is being valued

If the IRS challenges the valuation, an experienced forensic accountant will be in a position to defend the client’s position and will provide testimony in a court trial if no settlement is reached.

Examples of Tax-Related Estate and Gift Matters Handled by the Forensics Team

  • Transfer of ownership interest in a business that is closely held while establishing discounts for estate and gift matters.
  • Fulfilling the taxation requirements related to the charitable contribution of equity interest.
  • Assessing the valuation of common stock in order to issue employee stock options (ESOPs) in accordance with the standards established under Section 409A.

Role of a Forensic Accountant in Estate Litigation

Threatened or actual litigation is a common occurrence in the matters of estate and trust. This often involves complex financial issues, requiring valuation, income and asset verification, and in some cases, full reconstruction of statutory accounts.

A forensic accountant and their team can employ the best possible forensic skills and work in coordination with the attorney to trace hidden assets and income transactions.

They will also provide meticulous expert reports on their findings, and prepare valuation reports for business interests or assets that are integral to the estate.

To withstand scrutiny from the IRS, the forensics team should have the credentials to be classified as a “qualified appraiser” and follow the best accounting and forensic practices to determine the valuation for an estate filing.

In coordination with the attorney, the forensic accountant should be able to defend their valuation before an IRS field agent in order to try and avoid tax court proceedings.

Typical Services Offered for Estate and Gift Matters

  • Estate and gift valuation
  • Defense before the IRS related to estate and gift returns
  • Verification of estate assets
  • Analysis of estate and gift related financial transactions
  • Accounting review or accounts reconstruction of the Trust
  • Investigation of the economic and financial compliance with the Trust’s terms and conditions
  • Forensic investigation of potential fiduciary breach by a trustee or another type of fraudulent conduct