Pełna transkrypcja odcinka Beyond the Property Value: Real Estate Valuations & Estate Planning

purposes beyond the scope of this podcast, those real estate assets are typically held in a partnership or an LLC or some type of legal entity versus held by the individual themselves. 00:05:08.959 --> 00:05:17.759 And for that reason, when they're making these transfers out of the estate, they're actually transferring ownership in those holding companies. 00:05:17.920 --> 00:05:26.639 It's a transfer of an interest in the partnership or the LLC versus the ownership directly of that real estate. 00:05:26.879 --> 00:05:39.199 So the question then becomes for us, what is the fair market value of the ownership interest in that holding company rather than the value of the real estate itself? 00:05:40.160 --> 00:05:40.480 Okay. 00:05:41.120 --> 00:05:43.600 I'm glad you clarified that long answer. 00:05:43.839 --> 00:05:48.319 No, but I'm glad you clarified that because a lot of people, I mean, might not know that. 00:05:48.480 --> 00:05:52.879 And it it takes a lot of work to kind of just make sure like you're evaluating properly. 00:05:53.040 --> 00:05:58.800 So let's go between real estate appraisal versus business valuation. 00:05:59.040 --> 00:06:06.800 So I think it's an important distinction because people may assume that one valuation professional handles everything when real estate is involved. 00:06:06.959 --> 00:06:13.040 So does the business valuation professional actually value the real estate, or how do those roles differ? 00:06:13.360 --> 00:06:17.199 Yeah, I think this is a really important distinction, like you said. 00:06:17.360 --> 00:06:23.519 So valuation or appraisal as a discipline includes several different areas. 00:06:23.680 --> 00:06:28.800 Those areas can be business valuation, which is what I do and my team at Bennett Thrasher does. 00:06:28.879 --> 00:06:31.120 We are focused on valuing the business. 00:06:31.279 --> 00:06:35.680 In this case, what we're talking about in this podcast today, the holding company. 00:06:35.920 --> 00:06:41.680 Other areas of valuation or appraisal include real estate, machinery equipment. 00:06:41.759 --> 00:06:56.319 So there are specialized appraisers that will go in and value all types of machinery and equipment from large industrial machinery to very unique niche type machinery and equipment, um, gems and jewelry, art and estate work. 00:06:56.399 --> 00:07:00.319 So those are different disciplines of valuation or appraisal. 00:07:00.560 --> 00:07:05.839 Again, you had mentioned at the beginning, I'm an accredited senior appraiser through the American Society of Appraisers. 00:07:05.920 --> 00:07:10.079 That is a designation for valuation, business valuation professionals. 00:07:10.319 --> 00:07:17.360 A real estate appraiser, a machinery and equipment appraiser, they have different designations through different professional organizations. 00:07:17.519 --> 00:07:24.000 So the short answer is no, we do not value as a business valuation professional. 00:07:24.079 --> 00:07:26.079 I am not

also valuing the real estate. 00:07:26.160 --> 00:07:28.160 I'm not valuing machinery and equipment. 00:07:28.319 --> 00:07:38.800 We rely on other appraisal professionals to go in and perform their methodologies, although there is some commonality between the methodologies in valuation in general. 00:07:38.959 --> 00:07:43.680 So there's that commonality between how a piece of real estate is appraised and how a business is appraised. 00:07:43.839 --> 00:07:46.079 But each has their own nuance for sure. 00:07:46.240 --> 00:08:01.920 So again, my role and that of my team at Bennett Thrasher is really business valuation, which means I'm focused on valuing that ownership interest in the entity or the business that owns the real estate or marketable securities or an operating company. 00:08:02.879 --> 00:08:03.199 Okay. 00:08:03.759 --> 00:08:06.240 So let's talk about the coordination challenge. 00:08:06.480 --> 00:08:16.000 So when you have multiple properties, entities, advisors, and appraisers involved, I imagine the process itself can become just as challenging as valuation. 00:08:16.240 --> 00:08:20.560 So, what is one of the biggest challenges attorneys face in these engagements? 00:08:21.519 --> 00:08:22.879 That's a great question. 00:08:23.040 --> 00:08:36.960 And I think a reason why we can be so helpful to attorneys because we can really take that, the management of what can be a very cumbersome process dealing with many different professionals. 00:08:37.679 --> 00:08:44.799 I think we can really take that burden from the attorneys and handle it more efficiently for them and for their clients. 00:08:45.120 --> 00:08:49.600 So it's often not the valuation methodology that can be the challenge. 00:08:49.759 --> 00:08:51.919 It's really managing that process. 00:08:52.080 --> 00:09:02.720 When you have, for example, when an attorney has a client that owns, let's say five holding companies, the engagement then may require multiple real estate appraisals. 00:09:02.879 --> 00:09:06.720 So let's say each of those five holding companies has one or two pieces of real estate. 00:09:06.799 --> 00:09:11.440 So you go anywhere from five to ten real estate appraisals that need to be coordinated. 00:09:11.679 --> 00:09:14.399 That those companies may own marketable securities. 00:09:14.559 --> 00:09:22.080 So you're you're having to collect statements on what types of marketable securities they own, any type of assets or investments that they have. 00:09:22.240 --> 00:09:34.320 So there's a lot of coordination in valuing a holding company to get the right set of appraisers aligned to produce that value that they need for their uh state tax. 00:09:34.480 --> 00:09:40.080 So all of those require communicating with each professional, coordinating information. 00:09:40.240 --> 00:09:50.720 So if the attorney has to be the quarterback for that process, they're having to deal with many of those separate advisors and making sure each one is getting the correct

information. 00:09:50.960 --> 00:09:53.519 Am I getting the information I need for the business evaluation? 00:09:53.600 --> 00:09:58.240 Is the real estate appraiser getting the information they need from the client to move forward with their piece? 00:09:58.320 --> 00:10:02.639 And then we all need to typically coordinate that information. 00:10:02.799 --> 00:10:05.440 So there's a timing piece of it as well. 00:10:05.600 --> 00:10:30.879 So it can really become a headache for the attorney to source all of the appraisers, coordinate all of the information, make sure they have the appropriate client contact, make sure all of the timing is aligned and that it is moving forward to meet their client's goals, and then make sure that you know the appropriate person is communicating with the client, communicating the status of all of those moving pieces to the attorney. 00:10:30.960 --> 00:10:33.360 So they are make sure they're meeting their clients' needs. 00:10:33.519 --> 00:10:39.039 So that's often sometimes something that can become a real headache for the attorney. 00:10:39.120 --> 00:10:41.039 They don't want to do it necessarily. 00:10:41.200 --> 00:10:43.120 It's a very big time suck for them. 00:10:43.519 --> 00:10:51.519 So um, if they've got to be acting as that project manager, that's something that we can do and we can take that burden from them. 00:10:51.679 --> 00:10:55.840 And I think it's much more efficient because that's pretty much the world that we live in. 00:10:56.000 --> 00:10:56.159 Yeah. 00:10:56.240 --> 00:10:56.399 Yeah. 00:10:56.639 --> 00:11:06.720 And for them, it's not necessarily they're there to make sure that the strategy is that they're coming up with the strategy correctly and that they're executing that strategy for their clients. 00:11:06.799 --> 00:11:08.559 And and this is just one piece of it. 00:11:08.720 --> 00:11:12.000 So they don't want that whole process to make this. 00:11:12.559 --> 00:11:18.399 Especially they're like, I'm not really here for that, but they're like, I don't want to make it a whole lot easier. 00:11:19.120 --> 00:11:22.000 Making sure the timing is, you know, correct. 00:11:22.080 --> 00:11:31.279 And I think a lot of times you you can lose sight of, oh, they re they needed that one piece of information, and now that's holding up so many other things. 00:11:31.919 --> 00:11:38.399 So yeah, so that's something that I think that we can effectively do that can be really helpful to attorneys. 00:11:38.639 --> 00:11:38.799 Right. 00:11:39.039 --> 00:11:40.080 Huge asset. 00:11:40.399 --> 00:11:43.440 Okay, so let's go into managing the process efficiently. 00:11:43.600 --> 00:11:45.200 You already kind of touched on it a bit. 00:11:45.360 --> 00:11:55.679 And with that many moving pieces, good coordination can probably make a major difference in keeping the engagement on track, which you just explained very, very thoroughly. 00:11:55.919 --> 00:12:01.759 So, how can the valuation process

be managed more efficiently for the client and their advisors? 00:12:02.480 --> 00:12:10.080 You know, it's not untypical for or unusual for us to work with clients that don't necessarily know what they have. 00:12:10.320 --> 00:12:10.639 Okay. 00:12:10.799 --> 00:12:18.480 Um, we've had a lot of clients, multi-generational families, that maybe the parents, they were the one that curated the assets. 00:12:18.559 --> 00:12:22.000 They formed the company, and it was over years and years. 00:12:22.080 --> 00:12:37.279 And so all of a sudden there's this collection of companies and assets that hopefully not, but sometimes the bulk of the information is held by those individuals, um, not necessarily so they know all in their mind. 00:12:37.360 --> 00:12:41.039 They know, like, okay, I know that we've got this piece of real estate, we've got this and that. 00:12:41.120 --> 00:12:49.440 And yes, there's tax returns and things to support it, but there's oftentimes cases where it's not laid out nicely on a spreadsheet where everything is identified. 00:12:49.679 --> 00:12:54.080 So you've got that second generation coming in and saying, what are we even looking at? 00:12:54.159 --> 00:12:54.960 I'm not quite sure. 00:12:55.039 --> 00:12:58.639 Like, I know we have all these assets, but I'm I'm not quite sure how they all fit together. 00:12:58.799 --> 00:13:00.399 I don't know the different entities. 00:13:00.720 --> 00:13:05.360 So I think that that is a big area where we can help. 00:13:05.519 --> 00:13:18.879 We can start with usually working with their CPA to help identify what are the different companies that need to be valued, who owns what interests in each company and what assets are included in each of those. 00:13:19.120 --> 00:13:27.600 And then you go a little bit further, working with those accountants and saying, okay, here are the different assets we've identified which need to be valued. 00:13:27.840 --> 00:13:33.679 Um, in terms of maybe we need to pull in a real estate appraiser or a machinery and equipment appraiser to value some of these assets. 00:13:33.759 --> 00:13:37.440 So we can work with them to do that and help identify those. 00:13:37.840 --> 00:13:40.879 Then we work with several different real estate appraisal companies. 00:13:41.039 --> 00:13:52.000 So we can work with um clients that have very broad, diverse real estate portfolios, or they might have just a handful of five to ten commercial properties. 00:13:52.240 --> 00:13:59.120 Um we can work to source competitive fee quotes from different real estate appraisal companies. 00:13:59.360 --> 00:14:00.879 The attorneys don't have to do that. 00:14:01.039 --> 00:14:04.240 We can then present it to the attorney, to the client, they can make a decision. 00:14:04.480 --> 00:14:16.320 And again, it's us quarterbacking that whole process, making sure that their timing, the real estate appraiser's timing, is going to be my timing because I need their input to get what I need to the attorney. 00:14:16.559 --> 00:14:28.000 So then we can coordinate that so that all of those pieces fit together simultaneously and we're meeting the timing needs of the attorney and they can meet their clients' needs. 00:14:28.559 --> 00:14:33.759 So let's go into why minority interests may not equal prorata value. 00:14:34.000 --> 00:14:37.200 So let's get into an area that can be surprising for clients. 00:14:37.360 --> 00:14:42.080 The value of a minority ownership interest isn't always as simple as doing the math. 00:14:42.320 --> 00:14:50.960 So why might a 30% or 49% ownership interest be worth less than that same percentage of the underlying real estate value? 00:14:51.120 --> 00:14:52.159 And this is very interesting. 00:14:52.240 --> 00:14:54.480 So I will definitely want to hear what you've got to say. 00:14:54.720 --> 00:15:05.919 Yes, Sharday, this really gets to the heart of the evaluation work that we do at Bennett Thrasher, which is for the purpose of preparing qualified appraisals, again, that meet that IRS standard. 00:15:06.080 --> 00:15:07.279 That's so key. 00:15:07.440 --> 00:15:17.200 And again, that's kind of talking about what a qualified appraisal meeting that IRS standard is a little bit, it's beyond the scope of this podcast and also very boring. 00:15:17.840 --> 00:15:19.519 But it is very, very important. 00:15:20.159 --> 00:15:20.799 Very important. 00:15:21.039 --> 00:15:30.559 So oftentimes, you know, we are tasked to value an interest in a company, in this case, a holding company, a real estate holding company that is less than 100%. 00:15:31.440 --> 00:15:44.720 So, particularly if it is getting transferred to a trust, that transfer is oftentimes going to be less than even if that person owns 100% of this company, the transfer is going to be less than 100%. 00:15:45.600 --> 00:15:48.159 Um, and that's for tax strategy purposes. 00:15:48.720 --> 00:15:53.840 So we're typically valuing something that is less than 100% or even less than controlling. 00:15:54.000 --> 00:15:59.120 So we would just for simplification purposes, let's call controlling 51%. 00:15:59.840 --> 00:16:00.159 Got it. 00:16:00.320 --> 00:16:06.480 Um, so 50% or less can be considered typically a non-controlling interest. 00:16:06.720 --> 00:16:14.480 So in that case, the application of discounts to that pro-rata value are warranted under the fair market value standard. 00:16:14.639 --> 00:16:15.919 This is the world that I live in. 00:16:16.080 --> 00:16:20.720 Fair market value to support these tax strategies for gift and estate tax purposes. 00:16:20.879 --> 00:16:31.759 So, for example, let's say that we're we're valuing a holding company, and this holding company primarily owns real estate assets, and let's say those are worth 10 million. 00:16:31.919 --> 00:16:34.000 Then they own a little cash of a million. 00:16:34.080 --> 00:16:36.960 They own some maybe$4 million of marketable security. 00:16:37.120 --> 00:16:42.399 So just for

simplification purposes, we'll say that their total assets are worth$15 million. 00:16:43.200 --> 00:16:48.159 We've been tasked by the attorney to value a 33.3% interest. 00:16:48.240 --> 00:16:58.320 Just for so for simplified math, the pro rata value of a 33 and a third interest, the pro rata value of 15 million is 5 million. 00:16:58.559 --> 00:17:10.559 So, however, under that fair market value standard, the value of that 33.3% interest could be less than that$5 million or that pro rata value. 00:17:10.880 --> 00:17:21.359 So we would consider some of the additional questions that we would ask related to the ownership of that interest, in particular as it relates to that value. 00:17:21.839 --> 00:17:35.920 Because it's a private company owner, it's not as simple as just selling that interest on a public stock exchange or going on your computer and you know, type in a few keys and then all of a sudden you've liquidated that interest. 00:17:36.160 --> 00:17:48.559 Um, so a few of the questions that would relate to discount and calculating that value on a discounted basis would be can the owner of that interest force the sale of the real estate? 00:17:48.720 --> 00:17:50.480 So, how are they going to realize that value? 00:17:50.640 --> 00:17:59.359 How are they, if I own 33.3% and that's in this big shopping center, how do I actually get them the money for that? 00:17:59.680 --> 00:18:02.559 Can I force the sale of that piece of real estate? 00:18:02.799 --> 00:18:03.839 Most likely not. 00:18:04.000 --> 00:18:06.559 Um, can I force the sale of those marketable securities? 00:18:06.720 --> 00:18:08.720 No, I don't have the control to do that. 00:18:08.799 --> 00:18:13.039 And then I force and say, okay, well, we have$1 million of cash sitting on the balance sheet. 00:18:13.119 --> 00:18:14.799 I want some of that cash. 00:18:15.359 --> 00:18:19.519 If I'm 33.3, I typically cannot access that value of that. 00:18:20.480 --> 00:18:22.640 I can't determine who's the management. 00:18:22.799 --> 00:18:27.440 I can't determine how capital is being deployed and spent in the company. 00:18:27.759 --> 00:18:40.240 So it makes it very challenging for that 33.3% owner to actually access that value, that prorata value of 5 million. 00:18:40.319 --> 00:18:48.079 But why it's discounted is because it really suffers from these different features, rights and restrictions, is what how we would look at them. 00:18:48.400 --> 00:18:48.720 Okay. 00:18:49.279 --> 00:18:52.160 So let's talk about discount for lack of control. 00:18:52.640 --> 00:18:54.559 You already kind of went in a bit. 00:18:54.640 --> 00:19:01.200 So one factor that can affect that value is how much control the owner actually has over the entity and its decisions. 00:19:01.440 --> 00:19:07.519 What is a discount for lack of control and why does it matter when valuating a minority interest? 00:19:08.079 --> 00:19:18.640 So a lot of the things that I just mentioned, the ability to make distributions, the ability to sell real estate, all of those are things that require control. 00:19:18.880 --> 00:19:26.079 And then to access the value of that cash is uh what we would consider what is the marketability of that interest in that company. 00:19:26.319 --> 00:19:29.599 So a minority owner in a company. 00:19:29.759 --> 00:19:36.720 So in our example, our 33.3% interest order, they generally cannot control operations, as we said. 00:19:36.880 --> 00:19:41.119 They can't select management, they can't get rid of a manager that they don't like. 00:19:41.359 --> 00:19:48.240 They can't force those distributions of cash, they can't force liquidation of assets to realize value. 00:19:48.400 --> 00:19:54.799 Um, so they can't control a lot of the major decisions that would enable them to access that value. 00:19:55.119 --> 00:20:00.559 So those control provisions are considerations under the fair market value standard. 00:20:00.799 --> 00:20:10.400 So because the owner lacks those authorities, because the fair market value of that interest then that we're looking at is not 5 million. 00:20:10.559 --> 00:20:16.319 It is oftentimes discounted from that proportional share of asset value. 00:20:16.640 --> 00:20:24.640 This is referred to, in this example, a discount for lack of control, or sometimes it's referred to as a minority interest discount. 00:20:24.960 --> 00:20:25.279 Okay. 00:20:25.599 --> 00:20:33.200 So this is one of the two major discounts that we look at when we're preparing a valuation under the fair market value standard. 00:20:33.920 --> 00:20:34.240 Okay. 00:20:35.119 --> 00:20:38.160 So let's talk about discount for lack of marketability. 00:20:38.319 --> 00:20:40.160 I know you brought that word that term up. 00:20:40.319 --> 00:20:42.799 So control isn't the only consideration. 00:20:43.200 --> 00:20:47.839 There's also the question of how easily someone can actually sell that ownership interest. 00:20:48.079 --> 00:20:56.400 So, what is a discount for lack of marketability and how can that affect the value of an interest in a private real estate holding company? 00:20:56.640 --> 00:21:03.039 So, bottom line, buyers are generally going to pay less for an asset that is difficult to convert to cash. 00:21:03.279 --> 00:21:10.079 So, if you're thinking, we're again, we're valuing a 33.3% interest in a private company. 00:21:10.400 --> 00:21:13.359 Private company, by its nature, it's not publicly traded. 00:21:13.440 --> 00:21:20.319 There's no exchange that I can simply list my interest on, and there's a market out there of buyers for it. 00:21:20.480 --> 00:21:23.440 Um, so it it cannot be sold quickly, typically. 00:21:23.680 --> 00:21:25.119 It takes time for that price. 00:21:25.440 --> 00:21:28.160 There's only so many people that may be interested in buying it. 00:21:28.319 --> 00:21:41.119 There may not be a sufficient pool of buyers because when I look at the agreement, whether that's the shareholder agreement,

partnership agreement, that interest may be subject to owner's transfer restrictions. 00:21:41.359 --> 00:21:47.599 If you think about a family entity, the idea of that family entity is typically let's keep this in the family. 00:21:48.079 --> 00:21:58.000 So oftentimes there are restrictions that say this is the small pool of people that you may be able to transfer this interest to, and under these certain conditions. 00:21:58.160 --> 00:22:10.240 So that all relates to the Marketability of this interest is just simply not as attractive as buying an interest in a publicly traded company that can be liquidated and turned into cash very quickly. 00:22:11.119 --> 00:22:11.440 Okay. 00:22:12.400 --> 00:22:15.599 So let's go into common valuation mistakes. 00:22:16.160 --> 00:22:24.480 So we've talked about what a strong valuation process looks like, but there are also mistakes that can make a valuation much harder to defend later. 00:22:24.640 --> 00:22:28.640 So what are some of the common mistakes you see in these engagements? 00:22:29.519 --> 00:22:40.480 So again, what my team at Bennett Thrasher and I do is to prepare valuations that meet that qualified appraisal standard as defined by the IRS. 00:22:40.720 --> 00:22:52.640 So going into those regulations again in depth, not part of this scope of this podcast, but they are very robust requirements to meet that qualified appraisal standard. 00:22:52.799 --> 00:22:57.519 And many attorneys want that because it deals with the statute of limitations. 00:22:57.599 --> 00:23:02.640 It only gives the IRS so much time to go back and review that gift that was made. 00:23:02.880 --> 00:23:10.480 So that's a really important reason why you should have an appraisal that meets that qualified appraisal standard. 00:23:10.640 --> 00:23:14.079 And so there's a qualified appraisal standard and a qualified appraiser. 00:23:14.240 --> 00:23:16.240 So kind of two different components. 00:23:16.400 --> 00:23:18.880 So I would say that's number one key. 00:23:19.039 --> 00:23:24.240 You should really have an analysis or an estimate of value that meets that standard. 00:23:24.480 --> 00:23:37.119 Other mistakes or areas of caution that I would include would be reliance on an old, if you're looking at a real estate holding company primarily, reliance on an old or an outdated real estate appraisal. 00:23:37.440 --> 00:23:40.000 There's a cost component to a real estate appraisal. 00:23:40.240 --> 00:23:48.000 If you have multiple holding companies that hold multiple real estate parcels, you've got to pay for multiple real estate appraisals. 00:23:48.240 --> 00:23:49.920 That is worth the money. 00:23:50.240 --> 00:23:52.799 I would say the same thing for a business valuation. 00:23:52.960 --> 00:24:06.720 It is worth the money to get those done appropriately and buy those qualified appraisers in the long run because you're going to, you know, potentially suffer review consequences down the road if you don't. 00:24:06.880 --> 00:24:10.799 So relying on an outdated or an old real estate appraisal. 00:24:11.119 --> 00:24:11.599 Got it. 00:24:12.160 --> 00:24:14.480 Particularly in a market that's changing. 00:24:14.559 --> 00:24:28.160 So let's say Atlanta, like the Atlanta real estate market, commercial real estate market, we've seen so many fluctuations through COVID and through various other ups and downs in the economy that impact the value of real estate. 00:24:28.319 --> 00:24:32.160 So relying on an old appraisal is really questionable. 00:24:32.559 --> 00:24:37.200 Probably not a good source of information for that valuation. 00:24:37.519 --> 00:24:44.000 I would say ignoring or not appropriately considering the rights and restrictions in an operating agreement. 00:24:44.240 --> 00:24:48.079 We review a lot of operating agreements, shareholder agreements. 00:24:48.240 --> 00:24:58.559 Again, those are the sources of the rights and restrictions that we are using to support those discounts for lack of control, discounts for lack of marketability. 00:24:58.720 --> 00:25:06.960 So important to review those agreements and be documenting why there is support for those, that appropriate level of discounts. 00:25:07.119 --> 00:25:09.759 Don't assume that discounts are automatic. 00:25:09.920 --> 00:25:15.680 I think that just putting in a standard, oh, I'm gonna, you know, I think that the discounts are typically in this range. 00:25:15.759 --> 00:25:20.240 So I'm just gonna slap this discount on and not put in a lot of support for it. 00:25:20.319 --> 00:25:22.000 That's a very bad idea. 00:25:22.160 --> 00:25:23.920 And the IRS is looking at that. 00:25:24.000 --> 00:25:29.920 They want to know that you've actually looked, you've looked at those rates and restrictions of that interest in particular. 00:25:30.160 --> 00:25:36.480 You're using the studies that are out there to quantify the discounts to come up with a discount that is well supported. 00:25:36.640 --> 00:25:38.480 So I think that is very important. 00:25:38.720 --> 00:25:44.640 You know, for the attorneys, I think making sure that those governing documents are up to date. 00:25:44.799 --> 00:25:46.720 Um, oftentimes they are not. 00:25:47.039 --> 00:25:50.480 Attorneys that we're working with, they weren't the original preparers of those documents. 00:25:50.640 --> 00:25:53.759 So I think that those are some of the areas of caution. 00:25:54.240 --> 00:25:54.559 Okay. 00:25:54.960 --> 00:25:55.599 Thank you. 00:25:55.920 --> 00:25:58.160 Those are some great tips for a lot of people. 00:25:58.240 --> 00:26:00.799 Like, okay, let me, I might have done that. 00:26:00.880 --> 00:26:04.720 Let me let's let's go back and like revise or review everything. 00:26:05.039 --> 00:26:07.839 Okay, so what attorneys and advisors should have ready? 00:26:08.000 --> 00:26:09.680 So let's dive into that a little bit. 00:26:09.920 --> 00:26:16.880 A lot of those issues seem like they could be avoided or at

least minimized with the right information available from the beginning. 00:26:17.119 --> 00:26:23.519 So, what should attorneys, advisors, and their clients have ready to help the valuation engagement more efficiently? 00:26:23.920 --> 00:26:27.680 Our valuation engagement letters go out with a list of requested information. 00:26:28.000 --> 00:26:28.160 Okay. 00:26:28.240 --> 00:26:28.319 Okay. 00:26:28.799 --> 00:26:32.319 Best case scenario, our clients have all of this information. 00:26:32.480 --> 00:26:34.480 They are accountants by nature. 00:26:34.559 --> 00:26:37.519 So they are very much like, I need this information. 00:26:37.920 --> 00:26:40.799 I wish I could say that that was what happened all the time. 00:26:40.960 --> 00:26:44.079 I know the attorneys wish they could say that that's how it always was. 00:26:44.240 --> 00:26:56.240 Unfortunately, it's not, but a lot of the information that we would need obviously includes good, clean financial statements or good, clean tax returns, tax returns that are up to date. 00:26:56.319 --> 00:27:02.079 Who knew you could go two years and not file your tax returns, but you can leave statements that have done that. 00:27:02.319 --> 00:27:13.200 So tax returns, financial statements, operating agreements, shareholder agreements, partnership agreements, whichever of those apply for the type of organization that you are in. 00:27:13.440 --> 00:27:27.680 And this would be if I could speak directly to the business owners, to these private company owners, make sure you're reviewing your operating agreement, shareholder agreement, buy sell agreement if you have one, partnership agreement. 00:27:27.839 --> 00:27:34.160 Make sure those documents, they're not just to be put together when the organization is formed. 00:27:34.480 --> 00:27:39.759 Those are living documents that should be updated as your company changes. 00:27:40.319 --> 00:27:49.039 So I would say operating agreements, org charts, lists of your property, who owns what interests in each of the properties. 00:27:49.359 --> 00:28:00.160 If there are any prior appraisals, if you have done any type of prior appraisal, whether that's of for machinery and equipment, maybe you had to get an appraisal to support insurance that you acquired. 00:28:00.559 --> 00:28:07.839 Any type of appraisal is good to keep that on hand because that's always good information to give to us that we would request. 00:28:08.799 --> 00:28:09.039 Okay. 00:28:09.839 --> 00:28:13.519 So let's go into basis and broader planning considerations. 00:28:13.680 --> 00:28:18.559 So valuation is obviously one piece of a much broader estate planning strategy. 00:28:18.799 --> 00:28:22.799 And transferring every real estate interest may not always be the right answer. 00:28:23.039 --> 00:28:32.720 So should all real estate interests be transferred out of the state, or are there other tax and basis considerations the advisory team should evaluate? 00:28:33.200 --> 00:28:34.880 I think absolutely. 00:28:35.200 --> 00:28:51.119 This is um, again, I'm the valuation professional, so but this is a conversation that is somewhat part of the valuation discussion, particularly when we have these large estates that have numerous real estate holding companies. 00:28:51.359 --> 00:29:01.759 There's, you know, quite often there is a balance looking at what makes sense to transfer, what makes sense to hold, and get that step up in basis. 00:29:01.920 --> 00:29:07.920 So that's, I would say, primarily a discussion between the client and their tax advisor. 00:29:08.319 --> 00:29:16.799 Again, I'm the valuation professional, but they are typically working with a tax advisor, they are working with their estate planning attorney, and they are having those discussions. 00:29:16.880 --> 00:29:24.960 But it's absolutely an area where we're seeing more discussion because of that fluctuation in real estate value. 00:29:25.200 --> 00:29:28.559 Um, and again, because the exemptions have changed. 00:29:28.799 --> 00:29:34.319 We have uh higher exemption amounts now in terms of estate tax exemption. 00:29:34.480 --> 00:29:39.839 And so some assets were transferred into trusts when those exemptions were lower. 00:29:40.000 --> 00:29:41.599 That may not make the most sense now. 00:29:41.759 --> 00:29:47.519 And again, I know the attorneys are talking with their clients, the tax advisors are talking with their clients about these issues. 00:29:47.839 --> 00:29:59.119 Those are those types of planning discussions that the attorneys and the tax advisors are so that's what makes them so incremental and important in this process is to be having these discussions. 00:29:59.359 --> 00:30:14.880 So regardless of the strategy that they're using, whether that would be to hold the real estate to achieve the step up in basis or transfer it out, you need to understand what the value is first to be able to make those decisions. 00:30:15.039 --> 00:30:25.119 And so we would be part of that discussion and way, helping the tax advisor, helping the attorney understand what the value is so they can make those very important recommendations. 00:30:25.519 --> 00:30:25.839 Okay. 00:30:26.319 --> 00:30:26.720 All right. 00:30:26.880 --> 00:30:30.079 So let's close this thing out and round out this conversation. 00:30:30.160 --> 00:30:37.200 So we've covered a lot from appraisals and ownerships, interest to discount, documentation and coordination. 00:30:37.440 --> 00:30:46.160 So if attorneys and advisors remember just one thing when approaching real estate planning involving real estate holding entities, what should it be? 00:30:46.559 --> 00:30:48.480 I think it's probably more than one thing. 00:30:48.720 --> 00:30:49.039 Okay. 00:30:49.359 --> 00:30:57.599 I would say, I would say, and I'm saying I'm preaching to the choir, I'm sure the attorneys are saying the same thing as are the tax advisors. 00:30:57.759 --> 00:31:00.960 Start early, start discussion early.

00:31:01.200 --> 00:31:06.160 We all encourage our clients to start the process early to be thinking about it. 00:31:06.480 --> 00:31:16.160 In the best world, they do three to five years ahead of their planning and they're helping us put together the plan so we can give them the best outcome. 00:31:16.720 --> 00:31:20.880 In real life, a lot of it is happening because of an event. 00:31:21.119 --> 00:31:31.759 So it's not always possible to plan and execute that strategy the way that it would be the best outcome, but we're doing the best with you know what they're able to provide. 00:31:31.839 --> 00:31:42.000 So if there is an event, making sure that they are obtaining those real estate appraisals is particularly for, you know, that we're talking about a lot of real estate holding companies. 00:31:42.319 --> 00:31:45.680 Real estate is an asset that has gone up and down. 00:31:45.759 --> 00:31:47.920 It's very sensitive to market fluctuations. 00:31:48.079 --> 00:31:54.240 So getting a current real estate appraisal to support whatever that transfer date is is very important. 00:31:54.480 --> 00:31:55.839 It is worth the expense. 00:31:56.079 --> 00:32:07.359 Up-to-date governing docs, you know, making sure that we understand them, that they're up to date and current with the current needs of the structure of your business, not how when it was structured 20 years ago. 00:32:07.680 --> 00:32:20.319 And then really making sure that we're focusing on a process evaluation process with all of the different professionals that is really going to provide that supportable conclusion of value. 00:32:20.640 --> 00:32:22.799 Thank you, Sarah, for being back on. 00:32:22.960 --> 00:32:28.880 Thank you for providing such detailed, essential information insights on this topic. 00:32:28.960 --> 00:32:38.640 And hopefully people hear this and like, uh, maybe we need to grab somebody really quickly because we might we might need a little bit more guidance than we've had in the past. 00:32:38.799 --> 00:32:40.240 So thank you for being on. 00:32:40.319 --> 00:32:41.519 I hope to see you again. 00:32:41.680 --> 00:32:45.440 And I'm sure our audience would just can't wait to hear this conversation. 00:32:45.759 --> 00:32:46.400 I hope so. 00:32:46.559 --> 00:32:47.599 Thank you, Sharday. 00:32:47.680 --> 00:32:50.559 I appreciate the opportunity, of course. 00:32:51.519 --> 00:33:02.000 If there's one takeaway from today's conversation, it's that successful estate planning involving real estate holding companies requires more than simply knowing what the property is worth. 00:33:02.319 --> 00:33:16.160 Accurate appraisals, a clear understanding of the ownership interests being transferred, strong documentation, and coordination across the advisory team can all help create a valuation that is efficient, supportive, and flexible. 00:33:16.400 --> 00:33:18.400 Thanks for tuning in to Beyond the Ledger. 00:33:18.559 --> 00:33:24.319 For more insights and expert perspectives, visit bccpa.net and explore latest resources. 00:33:24.559 --> 00:33:27.599 And don't forget to like, follow, share, and subscribe. 00:33:27.839 --> 00:33:32.079 Until next time, I'm Sharday Lake Fields, and we'll see you for the next conversation.