Potentially significant changes are on the horizon with respect to current gift and estate tax exemption amounts. As part of the Tax Cuts and Jobs Act (TCJA) that went into effect in 2017, the estate tax exemption doubled for the tax years between 2018 to 2025. The exemption increased from $5.49 million in 2017 to $11.8 million in 2018 and is annually adjusted for inflation. For 2024, the exemption increased to $13.61 million per person or $27.22 million for a married couple.

These TCJA provisions are currently scheduled to sunset at the end of 2025 barring any changes in legislation and the estate tax exemption is projected to decrease to approximately $7 million effective January 1, 2026. Therefore, individuals with exemptions remaining should consider their estate planning options and take action as soon as possible before the current, more generous tax exemptions potentially expire. We note that on November 26, 2019, the Internal Revenue Service (IRS) clarified that individuals taking advantage of the increased gift and estate tax exclusion amount in effect from 2018 to 2025 will not be adversely impacted after 2025 when the exclusion amount is scheduled to drop to pre-2018 levels.

If your estate plan includes gifting illiquid securities (i.e., the securities are privately held or there is no active public market for the asset, business or security), the IRS generally recommends having a ‘Qualified Appraisal’ prepared by a ‘Qualified Appraiser’ to determine the fair market value (FMV) of the securities being gifted. FMV is generally defined as the price at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell, and both having reasonable knowledge of relevant facts. Such a determination requires the consideration of all available financial data, as well as all relevant factors affecting FMV.

Typically, a Qualified Appraiser will use one or more of the following three primary valuation approaches to determine the FMV of the securities. The income approach measures FMV based on the earnings capacity of the business and generally takes the form of either a discounted cash flow analysis using projected earnings or a capitalization of free cash flow analysis. The market approach values a business by comparing the subject company to publicly traded firms or actual metrics obtained in connection with the acquisition of companies that participate in the same or similar line(s) of business. The asset-based or cost approach focuses on the time, materials, and facilities necessary to build a business to its current position. Revenue Ruling 59-60 states that, “In general, the appraiser will accord primary consideration to earnings when valuing stocks of companies which sell products or services to the public; conversely, in the investment or holding type of company, the appraiser may accord the greatest weight to the assets underlying the security to be valued.”

Many appraisals that are the subject of gift and estate tax valuations include minority interests in closely held entities. Under FMV, adjustments for lack of control and lack of marketability are made to the values of minority interests when such adjustments are appropriate. For example, a controlling interest in a company may have more value than a minority interest because of the controlling shareholder’s ability to make changes to the company’s business policies, operating framework and capital structure. To this extent, if a minority interest is being valued, a discount for lack of control may be applicable.

Additionally, investors in private companies face a harder time converting their private holdings to cash compared to investors in publicly traded companies, as there is no public market for the shares and transfers may be subject to approval by management and/or other shareholders. Considering the lack of liquidity for privately owned holdings, a discount for lack of marketability may also be applicable.

A Qualified Appraiser is generally defined as an individual with verifiable education and experience in valuing the type of asset for which the appraisal is performed. A Qualified Appraiser will have (i) earned an appraisal designation from a generally recognized professional appraiser organization for the type of asset being valued; or (ii) has met certain minimum education requirements and has two or more years of experience in valuing the type of asset being valued.

Getting a Qualified Appraisal may be even more important now as the IRS announced in late 2023 that it was seeking to hire 3,700 employees nationwide. As part of the increased workforce, the IRS will be focused on hiring higher-graded revenue agents, which are specialized technical positions that generally focus on audits. In general, their cases typically revolve around the most complex tax returns, which may include estate and gift tax returns filed by high-net-worth individuals. On May 2, 2024, the IRS released an update on the Strategic Operating Plan, which stated, among other things, that “the IRS will increase audit rates by more than 50% on wealthy individual taxpayers with total positive income over $10 million, with audit rates going from an 11% coverage rate in 2019 to 16.5% in tax year 2026.”

How Citrin Cooperman Can Help

Citrin Cooperman’s Valuation Advisory Services Practice has decades of experience performing valuations of closely held entities and illiquid securities across a broad range of industries. Our team is comprised of dedicated professionals that have earned various advanced degrees and professional accreditations.

Our goal is to provide quality, defendable, independent, and objective valuations. Our team uses its extensive knowledge, analytical skills, reasoned judgement, modern technology, and industry experience to provide sound guidance and clear results that can withstand the upmost scrutiny.

In addition to our Valuation Advisory Services Practice, Citrin Cooperman’s Trusts and Estates Practice offers tailored strategies and comprehensive estate planning specifically designed to navigate an increasingly scrutinized tax environment. Additionally, our Trusts and Estates Practice collaborates closely with Citrin Cooperman’s Tax Compliance Practice to ensure that our clients benefit from a seamless integration of estate planning and tax compliance services.

To learn more or for specific inquiries, please reach out to Stephen Davis at sdavis@citrincooperman.com or Ross Hurwitz at rhurwitz@citrincooperman.com from the Valuation Advisory Services Practice, Howard Klein at hklein@citrincooperman.com or Mary T.D. Delman at mdelman@citrincooperman.com as co-leaders of the Trusts and Estates Practice, or an advisor in the Tax Compliance Practice.