Page 48 - Business Valuation for Estates & Gift Taxes

 Gifting or transferring an ownership interest in a limited partnership may be made at a lower val-
ue than that interest's pro rata share of net asset value. The reason for this is that a limited part-
nership interest is likely to be both non-controlling and non-marketable.

 FLPs can provide a vehicle for resolution of any disputes and avoid the expense and problems of
litigation.

 FLPs can help promote the family's knowledge of and communication about the family assets.

Data Gathering

The following information should be obtained in order to perform the valuation and should be refer-
enced in the report:

 Agreement of partnership (agreement) (or other type of business agreement depending upon the
form of the entity), along with all amendments, as well as a copy of the certificate of limited
partnership that has been filed with the state in which the partnership was created. The certificate
is an important document because it gives notice of the formation of the limited partnership and
the limited liability of the limited partners. Because different states have varying statutes, know-
ing the rules of the state in which the entity is formed provides the legal structure of the FLP in
conjunction with the terms of the agreement.

 List of the assets that were initially contributed to the partnership, as well as documentation
about any assets that were contributed after the formation of the FLP.

 Valuations of real estate and other assets held by the partnership as of the valuation date (for ex-
ample, market values of marketable securities). If the partnership owns interests in other closely
held businesses or partnerships, these interests must be separately appraised before the value of
the LP interest can be determined. If the entity has any liabilities, these values should be provid-
ed as well.

 Financial statements or tax returns (or both) for the partnership for a reasonable number of years,
or since inception. These documents will not exist for new partnerships.

 General partner's anticipated policies regarding distributions or a Section 754 election (or both).

 Information about if the FLP is ongoing, as well as a history of distributions (if any) made to
partners.

 Information such as minutes of partners’ meetings or other documents, if they exist, may give the
analyst some insight into the donor’s intent at the time the partnership formed.

Understanding the Agreement

The basic characteristics of the transferred interest in the FLP, combined with specific provisions in the
agreement and state law, form the foundation for the valuation adjustments used in arriving at the fair
market value of the transferred interest. A thorough understanding of the provisions of the agreement
will help the valuation analyst define the subject interest and the rights associated with it.

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