Gift value for illiquid asset

[JoeTaxpayer]

With the talk of tax reform, I am researching a particular aspect of the
gift tax. I understand the $5.49M exemption on the death of an
individual, the ability to retain that amount when one half of a couple
passes, etc. What I am trying to understand is the longer plan that say,
a rancher can use to pass the ranch, piecemeal, while alive.

If the ranch is worth $14M, a 1/1000 share can be passed with no gift
tax. My question is about valuation. I recall that there is an accepted
strategy that allows a discount to be applied since such as asset isn't
liquid. If I own 4 shares of the 1000 shares of "ABC Ranch" I
am not very easily going to find a buyer. What I am not able to find is
what kind of discount is standard for this type of gifting.

This is not a situation I personally face, I am trying trying to
formulate a response to those who object to my saying that with proper
planning, a small farm up to $20M can be transferred to the children and
grand children over the decades.

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[dpb]

On 20-Sep-17 4:47 PM, JoeTaxpayer wrote:
...

> If the ranch is worth $14M, a 1/1000 share can be passed with no gift
> tax. My question is about valuation. I recall that there is an accepted
> strategy that allows a discount to be applied since such as asset isn't
> liquid. If I own 4 shares of the 1000 shares of "ABC Ranch" I
> am not very easily going to find a buyer. What I am not able to find is
> what kind of discount is standard for this type of gifting.

That's the problem; there is no such "standard"; the courts have ruled
every situation must be evaluated on its own merits. There are some
general accountancy rules that are recognized but there is no magic one
percentage number you can apply universally. Just one recent overview
article you might find of interest...

<https://www.journalofaccountancy.com/issues/2009/jul/20091463.html>

> This is not a situation I personally face, I am trying trying to
> formulate a response to those who object to my saying that with proper
> planning, a small farm up to $20M can be transferred to the children and
> grand children over the decades.

Don't overlook the P.6166 deferment rule, either, though...

<https://www.americanbar.org/publications/probate_property_magazine_home/probate_2009_index/probate_mar_apr_2009_index/rppt_mo_premium_rp_publications_magazine_2009_ma_PlanningPayEstateTaxes.html>

We're fortunate to be where ground prices haven't reach such
astronomical levels as farther east; can't imagine what we'd do if were
in prime IL country instead of far SW KS...but it'd be ugly.

--

[Stuart O. Bronstein]

JoeTaxpayer <JoeTa...@comcast.net> wrote:

> If the ranch is worth $14M, a 1/1000 share can be passed with no
> gift tax. My question is about valuation. I recall that there is
> an accepted strategy that allows a discount to be applied since
> such as asset isn't liquid. If I own 4 shares of the 1000 shares
> of "ABC Ranch" I am not very easily going to find a buyer. What I
> am not able to find is what kind of discount is standard for this
> type of gifting.

The IRS used to allow substantial discounts for this kind of thing in
the past, but as I recall, they have been less cooperative more
recently. If you want to claim a discount, you have to show it with
expert testimony and hard numbers.

> This is not a situation I personally face, I am trying trying to
> formulate a response to those who object to my saying that with
> proper planning, a small farm up to $20M can be transferred to the
> children and grand children over the decades.

In theory it can be. But the devil is in the details. Because every
year the value of the property increases, so you have to evaluate the
situation every year. I have more or less frozen the value of
property by having the kids buy it from the parents, with the parents
forgiving mortgage payments. But it's not a simple process that's
easy to calculate all at one time.

--
Stu
http://DownToEarthLawyer.com

[JoeTaxpayer]

On 9/20/17 9:14 PM, dpb wrote:
> On 20-Sep-17 4:47 PM, JoeTaxpayer wrote:
> ...
>
>> If the ranch is worth $14M, a 1/1000 share can be passed with no gift
>> tax. My question is about valuation. I recall that there is an accepted
>> strategy that allows a discount to be applied since such as asset isn't
>> liquid. If I own 4 shares of the 1000 shares of "ABC Ranch" I
>> am not very easily going to find a buyer. What I am not able to find is
>> what kind of discount is standard for this type of gifting.
>
> That's the problem; there is no such "standard"; the courts have ruled
> every situation must be evaluated on its own merits.  There are some
> general accountancy rules that are recognized but there is no magic one
> percentage number you can apply universally.  Just one recent overview
> article you might find of interest...
>
> <https://www.journalofaccountancy.com/issues/2009/jul/20091463.html>
>
>
>> This is not a situation I personally face, I am trying trying to
>> formulate a response to those who object to my saying that with proper
>> planning, a small farm up to $20M can be transferred to the children and
>> grand children over the decades.
>
> Don't overlook the P.6166 deferment rule, either, though...
>
> <https://www.americanbar.org/publications/probate_property_magazine_home/probate_2009_index/probate_mar_apr_2009_index/rppt_mo_premium_rp_publications_magazine_2009_ma_PlanningPayEstateTaxes.html>
>
>
> We're fortunate to be where ground prices haven't reach such
> astronomical levels as farther east; can't imagine what we'd do if were
> in prime IL country instead of far SW KS...but it'd be ugly.
>

Thank you both. Especially for the articles cited here. They at least
confirm some of my assumptions.

[dpb]

On 21-Sep-17 6:35 AM, JoeTaxpayer wrote:
...

> Thank you both. Especially for the articles cited here. They at least
> confirm some of my assumptions.

Not that it affects anything (yet), but I heard Sen Grassley (IA) on
AgriTalk with Mike Adams yesterday morning. One of the subjects was
including repeal of estate tax in the reform package--according to Sen
Grassley, it's still in the mix. We can only hope. Writing to you
congress-critters in support would not be bad, with examples of
disasters that have or are likely to occur if you have any can share.

--

[John Levine]

In article <oq0dpm$gp3$1...@gioia.aioe.org>, dpb <no...@non.net> wrote:
>Grassley, it's still in the mix. We can only hope. Writing to you
>congress-critters in support would not be bad, with examples of
>disasters that have or are likely to occur if you have any can share.

It is my understanding that it is a myth that the estate tax forces
people to break up family farms. There are farms that are broken up
after the owners die, but it's usually because the heirs don't want to
farm, or have other disagreements. It also seems to me that if you
have an asset worth over $10M and don't do estate planning, you kind
of deserve what happens.

I would be interested in documented stories of people who did reasonable
estate planning but had to sell to pay the estate tax.

R's,
John

[Stuart O. Bronstein]

John Levine <jo...@iecc.com> wrote:

> It is my understanding that it is a myth that the estate tax
> forces people to break up family farms. There are farms that are
> broken up after the owners die, but it's usually because the heirs
> don't want to farm, or have other disagreements. It also seems to
> me that if you have an asset worth over $10M and don't do estate
> planning, you kind of deserve what happens.

Even for large estates, the tax code makes it easier for family farms
in particular, as well as other family businesses. First, for family
farms the code allows the land to be valued at how it is currently
being used, rather than its "highest and best use." That is to say
that if a farm might be worth a lot more if sold for development, it is
taxed as the lower value as if it were sold as and to be continued to
be used as a farm.

Additionally, for any family business that is worth 35% or more of the
decedent's estate, the estate tax can be paid over a period of up to 14
years, with interest of 2%.

--
Stu
http://DownToEarthLawyer.com

[JoeTaxpayer]

On 9/25/17 1:15 PM, Stuart O. Bronstein wrote:
> John Levine <jo...@iecc.com> wrote:
>
>> It is my understanding that it is a myth that the estate tax
>> forces people to break up family farms. There are farms that are
>> broken up after the owners die, but it's usually because the heirs
>> don't want to farm, or have other disagreements. It also seems to
>> me that if you have an asset worth over $10M and don't do estate
>> planning, you kind of deserve what happens.
>
> Even for large estates, the tax code makes it easier for family farms
> in particular, as well as other family businesses. First, for family
> farms the code allows the land to be valued at how it is currently
> being used, rather than its "highest and best use." That is to say
> that if a farm might be worth a lot more if sold for development, it is
> taxed as the lower value as if it were sold as and to be continued to
> be used as a farm.
>
> Additionally, for any family business that is worth 35% or more of the
> decedent's estate, the estate tax can be paid over a period of up to 14
> years, with interest of 2%.
>

The article the GOP was promoting was
http://dailysignal.com/2017/09/19/tax-reform-a-big-deal-to-a-mom-who-wants-to-keep-ranch-in-the-family/

or http://tinyurl.com/y88pdzy6

It just seemed to me that (a) there was no way this ranch was worth over
$11M, and even if it were, 5 kids = $140K/yr transfer, and a 33%
discount for illiquidity would be reasonable, so nearly $200K/yr right
now. As the kids marry, the number approaches, $400K/yr. In the end, a
ranch worth even $25M would be subject to no estate tax, with just a bit
of foresight.

More than this, I've read that only 50 of 5000 estates subject to the
estate tax are either farm or small business. This is all smoke and
mirrors by the GOP.

The article author hasn't returned my email. I asked if she had any idea
what the value of this ranch is. I bet she does, and it's not likely to
pay a dime in estate tax, all a GOP propaganda article.

[jmfbahciv]

How would the estate be treated under the old tax laws? I suspect a lot
of the tales you think are myths came from pre-1980s farm estates. A lot
of land around here, which used to be farms when I was a kid, are now
asphalt with a building (manufacturing or store). I don't know how that
land was evaluated (farm-use or highest and best use) when the owners died.


/BAH

[Stuart O. Bronstein]

jmfbahciv <See....@aol.com> wrote:

> How would the estate be treated under the old tax laws? I suspect
> a lot of the tales you think are myths came from pre-1980s farm
> estates. A lot of land around here, which used to be farms when I
> was a kid, are now asphalt with a building (manufacturing or
> store). I don't know how that land was evaluated (farm-use or
> highest and best use) when the owners died.

Before the 1980's (I think the law changed in 1978) the lifetime
exemption was $600,000, and there was no portability. I think farms
were valued at their highest and best use, so if they could be worth a
lot more if used for development, they were valued higher so the tax
could be a lot more. I'm not positive, but I think the low interest
and deferred payments also came in about that time.

--
Stu
http://DownToEarthLawyer.com