Appropriate Valuation Method

Sam McBuck has an estate of $10 million and would like to leave it to his nephews. Sam assumes he will live for at least 5 more years. The property in Sam’s estate currently includes the following assets:

An apartment building in downtown New York that Sam owns with three partners, each of whom wants to buy Sam’s interest
500 shares of MegaSounds, Inc., which represents a one-third interest in this closely-held corporation
A joint-and-last-survivor annuity with each of his three nephews; each annuity pays Sam $6,000 per month and will pay each nephew $4,000 per month after Sam’s death

At Sam’s death, which of the following valuation methods is most likely to reduce the value of his gross estate?

The alternative valuation date, because the annuities are declining in value with each passing month
The lack of marketability discount, because of the partial interest in the apartment building
The minority discount, because Sam owns less than a controlling interest in MegaSounds, Inc.
Special use valuation, because Sam’s nephews will be material participants in operating the apartment buildings.

CLICK TO REVEAL ANSWER

C is the answer. A minority shareholder in a closely held corporation sometimes qualifies for a minority discount, because a minority interest is unable to influence corporate policy, to compel dividend distributions, or other actions. The alternate valuation date will not be helpful, because the annuities will be valued as of the date of death even with an election of the alternate valuation date. The lack of marketability discount applies to a controlling interest in a closely held corporation. The co-ownership discount applies to real estate where the co-owners refuse to buy from or sell to the estate. In this case, the partners want to buy Sam’s interest.

Posted in CFP® Practice Question

About Dan Madden, CFP®

View all posts by Dan Madden, CFP® →