Events

On August 11th, Anchin held a webinar on valuation and the transfer of wealth to discuss current trends in the areas of tax, valuation, trust and estates, and gifting through a variety of different lenses. Our speakers included two accomplished leaders at Anchin, Michael Rudegeair, Tax Director in Anchin’s Private Client and Trusts & Estates Services Groups and Raymond Dragon, Senior Valuation Director in Anchin’s Litigation Support, Forensic, and Valuation Services Group.

TRENDS IN TRANSFER OF WEALTH

Currently, we are experiencing some of the highest interest rates the nation has seen in decades. The federal funds rate is at 2.50% compared to 0.25% one year ago and the Consumer Price Index (CPI) for June 2022 was up 9% over June 2021.  In addition, we are seeing a lower stock market, the IRS staffing up for audit examinations, and the introduction of the new “Inflation Reduction” Act.

As a result of these volatile market activities, we’ve seen a higher demand for estate planning services. Managing your estate plan is critical to ensure that your beneficiaries receive maximum benefits – the maximum amount of assets passing to them. These are three popular ways of reducing estate tax:

1. Annual exclusion gifting
   Making gifts on a regular basis is an estate planning tool that can reduce estate taxes while avoiding gift tax liability. An individual may give up to $16,000 per person annually free of gift tax, and married couples may give up to $32,000 per person per year.
2. Freezes
   Freezing is a planning strategy that shifts the future expected appreciation in the value of assets to the next generation without major tax consequences, essentially allowing future appreciation to grow outside your taxable estate. For example, a vacation home could be gifted into a trust for the family, then one’s estate tax calculation would include the value of the vacation home at the time of the gift and not the value of the vacation home at the time of your death.
3. Discounts
   This is one of the most commonly used tools. Discounting is done by valuing certain assets for estate tax calculations at less than their individual current value allowing more assets to be transferred a lower cost.

Taking the time to evaluate each client’s situation helps us provide them with a thoughtful analysis that includes our best recommendations. We then work with their attorneys and financial advisors to implement and monitor the plan, with the goal of leaving the most money to each client and their heirs.

TRENDS IN VALUATION

There has been a tsunami of demand for valuation since 2020. The two main reasons are the following:

1. The change in political control of the federal government in 2020, along with proposed increases in the estate tax rate and a lowering of exemptions. This led to high levels of gifting in 2020, which has continued in 2021 and 2022.
2. COVID-19’s arrival resulted in court shutdowns. As courts reopen, there is a rush to clear backlogs. Similar effects on merger and acquisition (M&A) and private equity have occurred, along with a greater emphasis on fair value in financial reporting.

While demand has soared, the ability to do the work has not, as valuations require judgement which takes years to develop, and many mid-career valuation professionals have been hired away by M&A practices. The result is longer lead times for valuations on an industry wide basis. Anchin has hired an additional experienced professional to handle the greater load.

Another trend we’ve noticed is the courts agreeing with the business valuation community that pass-through entities (PTEs) such as S corporations and limited liability companies (LLCs) should be valued like C corporations, perhaps in some cases after considering a small PTE premium. The IRS has maintained for years that PTEs, such as LLCs or S corporations, should be valued on a tax-free basis, producing much higher values. In the 2019 ruling of Kress v. United States, the U.S. District Court ruled that S corporations should be valued like C corporations, and that no PTE premium applies.

In addition, there has been an increased scrutiny of valuation discounts by the courts. Some practitioners have determined the discount for lack of control (DLOC) from takeover premiums, and determined the discount for lack of marketability (DLOM) from restricted stock and IPO studies, with no adjustments for the specifics of the company being valued. Courts have criticized this use of “generic” average discounts. Anchin considers company-specific quantitative metrics in determining discounts, as well as qualitative factors in company documents, along with other factors such as the company’s dividend history, which results in well-documented and defensible discounts.

Lastly, the past year has seen the return of high inflation in the U.S., which is projected to continue for several years. Inflation may likely remain high, labor costs will increase, and interest rates may continue to rise. Deglobalization will require massive investments to shorten supply chains. The retirement of the Baby Boomer generation will likely raise capital costs as Boomers draw down their savings and become net consumers in retirement. We could see a paradox of high inflation, recession, and low unemployment due to a shrinking labor force, a scenario not that different from the stagflation years of the 1970s. These factors may lower market multiples and company values on average, although nominal values may go up due to the massive increase in the money supply.

Whether the value of your company is adversely affected by inflation depends on whether price increases can be easily passed on, whether labor costs are significant in your industry, and whether the business is capital intensive. The best course of action is to develop a rigorous set of contingency plans that incorporate these factors.

For more information on how you or your company can effectively manage and take advantage of recent trends in valuation and the transfer of wealth, please contact Michael Rudegeair at [email protected], Raymond Dragon at [email protected], or your Anchin Relationship Partner.

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The content in this document is based on information that was available at the time of the webinar on August 11, 2022. Although our firm has made every reasonable effort to ensure that any information provided is accurate, we make no warranties, expressed or implied, on such information. Transmission of this information alone is not intended to create, and receipt does not constitute, any client-firm relationship. For specific tax or professional advice, please contact a member of our firm.