Estate Taxes
Estate taxes can be sharply reduced or eliminated through advance planning. Options to reduce estate taxes include trusts family limited partnership gifts prior to death gifts at death and skillful use of partial intrest. This article focuses upon partial intrest.
Partial interest valuation values the ownership of a portion of a property limited partnership general partnership corporation LLC or LLP. Partial interest valuation is more complex than most valuation problems and requires intense analysis and seasoned judgment. Reasons for performing a partial interest valuation are typically related to estate tax valuation or estate tax planning but could involve divorce business dissolution or valuation of collateral for a bank.
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.
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 noncontrolling interest typically has very limited ability to control decisions or influence the management and policies for a property or entity. Following are some of the detrimental effects of not having control of a property or entity:
- Cannot make decisions regarding selling the property perhaps in advance of a declining market or for personal reasons;
- Limited or no ability to impact the quality of management or to choose a different management company;
- Limited or no ability to impact business policies;
- Limited or no ability to impact strategies or tactics;
- Limited or no ability to impact refinancing the property;
- Limited or no ability to impact the level of financial leverage.
- Discounts for a partial interest are often 20 to 50 of the proportionate value of the entire property or entity.
Some of the factors determining the degree of discount for a partial interest include the percentage of ownership whether it is a controlling interest asset performance the number of partners the relationship between the partners issues with the property such as risk condition and financing market conditions and trends and the quality of the general partner.
The steps involved in a 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; and
- Calculate the value of the proportionate share after the discount for a partial interest.
The appraisal division of OConnor Associates is a national provider of investment real estate appraisal services including commercial real estate appraisal income tax property taxmarket researchcost segregationmarket studiesgift tax valuationsResidential property appraisalBexar County AppraisalTips and Tricks for Appealing Your Property Taxes in BexarFederal tax reduction.
About the writer: Patrick C. O’Connor has been president of O’Connor Associates since 1983 and is a recipient of the prestigious MAI designation from the Appraisal Institute. He is also a registered senior property tax consultant in the state of Texas and has written numerous articles in state and national publications on reducing property taxes. He continues to set the standard in direction and quality of our appraisal products adding services ranging from business valuations and business appraisals to cost segregation analysis for income tax reduction.
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