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Abstract: $8 trillion of personal wealth will transfer over the next 10 years. A substantial portion is private securities and closely held family business interests. Because no ready market exists, each one represents a unique and challenging valuation problem to the IRS. This article provides an examination of the issues involved in valuing closely held capital stock. Included are discussions of family buy-sell agreements, gifts of family stock, Revenue Ruling 59-60, approaches to value, adjustments for minority interests, marketability and control premiums. The article also discusses "fair market value" and the importance of underlying asset values to succession planning and the transfer process.
Introduction
Insurance professionals and estate planners who have clients whose personal assets include a substantial investment ownership in a closely held enterprise or family business have an important responsibility to their clients. They have the responsibility to recommend that their clients obtain authoritative advice and then provide assistance and implementation with regard to financial goals and objectives. Since ownership in the business is often a major component of the client's personal wealth, a professionally prepared business valuation is critical to ensure that the estate planning process is not only complete and comprehensive, but complies with new and existing Federal regulations regarding transfers within the family.
From a business planning perspective, the typical strong management/ownership relationship in a closely held business often requires a valuation study in order to support various ownership strategies, business directions, and investment alternatives. One of the most critical planning tasks facing a business owner is providing for the continuity of the enterprise. The most common strategy for this is a buy-sell agreement in which the stockholders of a closely held family business create a vehicle for the orderly transfer of the equity ownerships between the stockholders and their families.
Important estate planning objectives typically include providing liquidity for the transfer of ownership. The buy-sell agreement, if structured properly, creates a unique method to effectively address two complicated issues: providing for ownership changes and establishing an ongoing valuation procedure to value the stockholder's ownership in the business enterprise.
Once it is determined that a buy-sell agreement is an effective estate planning tool, the parties must be fully aware of the features of this important estate planning device. The...