estateplanning

BY THOMAS R . OHLGREN , CPA AND JANETTE BROOKS , CPA

While the Tax Cuts and Jobs Act ( TCJA ) didn ’ t repeal gift and estate taxes , it significantly reduced the number of taxpayers subject to them by raising exemptions . It ’ s important to note that the changes made to many of the income taxes and more specifically to the lifetime exemption amount for the gift taxes will expire at midnight Jan . 1 , 2026 , dropping the exemption from $ 12.92 million in net assets per person during 2023 back down to $ 5 million , adjusted for inflation . Still , factoring taxes into your estate planning is important , considering the sunsetting lifetime exemption .

Gift Tax Exemptions , Exclusions A gift tax exclusion allows individuals to transfer assets to others without incurring a tax liability . For 2023 , that limit is $ 17,000 per recipient . However , there is also a lifetime gift tax exemption , which is set at $ 12.92 million per person . This means an individual can transfer up to $ 12.92 million over their lifetime without incurring a gift tax liability .

Any gifting above these values will be subject to a gift tax rate of up to 40 percent , paid by the gift giver . The $ 12.92 million figure may sound familiar as exemptions for gift tax and estate tax were unified as of January 2013 .

Business Valuations in Lifetime Gifting Business valuations are critical to a successful tax strategy and involve a thorough understanding of the business , its market and its standing within the industry or market . A business valuation substantiates the interest ’ s fair market value for gift or estate tax exemption reporting , and audit protection . A

valuation also determines if the interest to be transferred is a minority or majority interest .

If a minority interest is transferred , discounts for lack of control or lack of marketability may be taken from the fair market value . In 2016 , Treasury regulations were introduced to eliminate discounts for lack of control and lack of marketability . The regulations to eliminate discounting were withdrawn in 2017 , but may be reintroduced .

Methods Used to Value Businesses When it comes to valuing businesses for estate tax purposes , there are three predominant methods used to determine fair market value :

• Income Approach : This focuses on the potential income the business can generate and considers the expected future earnings , cash flows and risk associated with the business to arrive at its value .

• Market Approach : This looks at recent sales and transactions of similar businesses to determine a fair market value , relying on market data and considering the prices of comparable businesses that have been bought or sold .

• Net Asset Value Approach : This focuses on the underlying assets and liabilities of the business . It considers the value of tangible and intangible assets , as well as any debts or obligations , to estimate the business ’ s worth . Each method provides a different valuation perspective and can be used in combination to arrive at a comprehensive and accurate assessment of a business ’ s value for estate tax planning purposes .

Benefits of Gifting Minority Interest Gifting minority interests in a business can be an effective way to transfer wealth to heirs while maximizing the lifetime estate tax exemption . The gift tax measures the portion of the asset that the recipient receives and the estate tax measures the value of what remains at the death of the donor .

When you transfer a minority interest in a company , it is typically valued at a discounted amount due to minority interest holders not having the same rights to make decisions or vote on important issues relevant to the company . A marketability discount is appropriate when the interest given cannot readily be turned into cash . Generally , a gifted minority interest cannot be readily sold in the marketplace allowing such a discount . A lack of decision making power is the reality for someone owning less than 50 percent of a business interest ; such a minority interest is discounted appropriately .

Conclusion A good business valuation makes lifetime gifts of business interests easier and may set the stage for additional discounts upon the death of the business owner .

Thomas R . Ohlgren , CPA is a partner with Baker Tilly . You can reach him at tomocpa @ gmail . com . Janette Brooks , CPA is founder of D4 Fiduciary and Business Advisory Services . You can reach her at janette @ d4fiduciary . com .

22 CALIFORNIA CPA AUGUST 2023 www . calcpa . org