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Piecing together the special considerations and components of a very large estate consisting of investment assets is a formidable task. Typically, most estates of this type are structured with a central FLP or LLC holding most of the assets. Frequently there are subsidiary entities designed to hold and manage investment assets which differ in nature from the estate’s primary asset class. Join William Frazier for instruction on the special valuation situations can arise in very large estates that are not commonly seen elsewhere such as; blockage discounts for large positions in equities, tiered discounts and discounts associated with investments in hedge funds and private equity partnerships. Managing data is an especially challenging part of valuing very large estates. Real estate appraisers, family offices and small groups add opaqueness and create coordination challenges. Understanding who will be providing data to you, their capabilities and desire to cooperate is essential for bringing all the components together.
Program Agenda
Here we take the case of Smith Family Partners, Ltd., an investment entity with a Net Asset Value (“NAV”) of $300 million. The valuation is for estate tax purposes and is governed by the “Fair Market Value” definition. From a valuation standpoint, the Very Large Estate has many decision points which affect value. Each asset class and even each subclass must be considered. For example, dollar for dollar, a small cap stock portfolio has a higher discount impact than does a large cap portfolio. Non-income producing real estate has a higher impact than income producing real estate. In smaller assignments such differences might require less delineation due to materiality. However, in Very Large Estates even a non-core asset which is just a few percentage points of the total may still be material and must be properly vetted.
Scoping Out the Assignment – How Many Moving Parts?
How many entities does Estate have a less-than absolute controlling interest in?
How many entities does Estate hold minority interest in?
Data
How available and detailed is financial information?
Centralized data repository (“data room”)
Where might road blocks be encountered?
Direct Investments
Private equity
Uncooperative GPs in minority investments
Real estate appraisals
Special Valuation Considerations
Blockage discounts for concentrated stock positions
Analysis of liquidity provisions of hedge fund and private equity partnerships
Contingent liabilities/litigation
Legal
Special rules
Chapter 14
Buy-Sell Agreements (IRC Section 2703)
Aggregation
Alternate Valuation Date
Promissory Notes
Market Value?
Face Value- if intra-family and use AFR?
Mechanics
Time schedule
Milestones
Dependence on orderly flow of information
Assembling your team
Delineating responsibilities
Adhering to the timeline
Communicating with the client
Being aware of “hot button” issues
Due diligence
The Appraisal
NAV
Values of Marketable Securities
Stocks
Bonds
Real estate owned directly
Appraisals
Financials
Type
Non-income producing
Recreational
Development
Income producing
Distributions
Values furnished by general partners or third party management
Hedge funds
Analysis of liquidity
Applicable discount, if any
Private equity
Are “marks” on an exit value basis?
Does the mark seem reasonable?
Is access to detailed information possible?
Revalue and apply discount, if applicable
Real estate and oil and gas
Supported by appraisal
Distributions
Outlook
Capital calls
Exit likelihood
Direct investments
Recent transactions
Appraisals
Financial statements
Access to management
Forecast
Discounts for Lack of Control
Stocks and Bonds – Closed end funds
Real estate- Partnership Profiles
Discounts for Lack of Marketability
Stocks – restricted stock studies
Variance by sub-class
Blockage?
Bonds- reasonable estimate
Special Considerations
Aggregation?
If Estate owns GP and LP interests (Voting and Non-voting interest for S corporations)
How much control?
Ahmanson case
Mellinger case
Tiered Discounts
Purpose of the tiers
Functional effect
Risk elements
Astleford case
Overview of how NICE Method might be employed
Learning Objectives
Discuss how to more effectively scope out a project.
Describe special factors to consider often not present in smaller projects.
Recall relevant Tax Court case law.
Review of the NICE Method as an alternate or corroborating methodology.
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