Gift, Estate, & Income Tax Compliance

March 1, 2022

Mercer Capital’s Value Matters® 2022-03

All in the Family Limited Partnership

Reprinted from Mercer Capital’s Family Business Director Blog

Many enterprising families have January 1, 2026, circled on their calendars. Why? Because the individual estate tax exemption reverts to $6 million (give or take, depending on inflation) in 2026 from its current level of $12 million. As a result, many estates that are not currently large enough to be taxable will become so, and the effective tax rate for all estates will increase.

A recent Wall Street Journal article highlighted the benefits, and potential downsides, of family limited partnerships, or FLPs (and their close cousin, the family limited liability company).

The “magic” of the FLP is the ability to transfer assets to heirs, and out of taxable estates, at discounted values. The WSJ article points out that the IRS is skeptical of many FLP planning strategies, noting that audit challenges may become more frequent as the IRS puts its new $80 billion enforcement budget to work.

While the valuation discounts applicable to FLPs may seem like estate planning magic, there really is no sleight-of-hand involved. Instead, valuation discounts reflect economic reality.

Fair Market Value Is an Arm’s-Length Standard

Estate planning transfers must be accounted for using the “fair market value” of the subject interest. Revenue Ruling 59-60 offers the following definition for fair market value: “the price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts.”

There’s a lot there, but for this post, we will simply highlight that fair market value is not determined with respect to a specific buyer or seller and therefore does not consider any familial relationship between the transferor and transferee in an exchange. Rather, fair market value describes how a transaction involving the subject interest would occur between two “willing” parties, both of whom have reasonable knowledge of relevant facts.

Under this standard of value, business appraisers typically value interests in FLPs using a three-step approach.

The Market Value Balance Sheet

The first step is to compile a listing of all assets owned by the FLP, reduced by any liabilities.  FLPs hold all kinds of assets, some of which have more readily ascertainable values than others. So, for some FLPs, the market value balance sheet can be constructed simply by referring to a brokerage statement, while other assets, like shares in a family business, will require a separate valuation process. Once the market values of the assets and liabilities have been determined, the difference between the two, referred to as “net asset value” or “NAV,” provides the starting point of the valuation analysis.

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Mercer Capital to Sponsor ACTEC’s 2026 Fall Meeting
Mercer Capital to Sponsor ACTEC’s 2026 Fall Meeting
Mercer Capital is pleased to sponsor the American College of Trust and Estate Counsel’s 2026 Fall Meeting, taking place October 15 through 18, 2026, at the Hyatt Regency Denver in Denver, Colorado. Bryce Erickson, ASA, MRICS, J. David Smith, CFA, ASA, and Sujan Rajbhandary, CFA, ABV, will attend on behalf of the firm.ACTEC’s national meetings bring together leading trust and estate lawyers, law professors, and other professionals for education, committee sessions, and peer discussion. This year’s professional program will address the prudent investment of unique and unusual assets; estate and business planning for farms, ranches, and oil and gas interests; publicity rights; digital assets; art collections; and assets held in regulated businesses.Bryce Erickson, ASA, MRICS, is a Managing Director and member of Mercer Capital’s board of directors. Since 1998, he has led approximately one thousand valuation engagements and has deep experience in gift, estate, and federal tax matters, litigation support, transactions, and business planning across a broad range of industries. Bryce leads Mercer Capital’s energy industry practice and is a regular contributor to Mercer Capital’s Energy Valuations Insights blog.J. David Smith, CFA, ASA, is a Senior Vice President at Mercer Capital and a senior member of the firm’s tax practice. He provides valuation services for tax planning, transactional purposes, and financial reporting, with particular experience in industries including financial services, oil and gas, and biotechnology. David is also a regular contributor to Mercer Capital’s Value Matters Newsletter.Sujan Rajbhandary, CFA, ABV, is a Senior Vice President and a member of Mercer Capital’s Gift, Estate & Income Tax Valuation Group. During his 20-year career at Mercer Capital, he has provided valuation and financial advisory services for tax planning and compliance, transactions, ownership transitions, and other corporate and shareholder matters. He is a regular contributor to Mercer Capital’s Value Matters Newsletter.Mercer Capital regularly works with attorneys, fiduciaries, business owners, and professional advisors on valuation matters involving gift and estate tax planning, trusts, ownership transitions, transactions, and disputes. The firm is proud to support ACTEC’s commitment to professional education and excellence in trust and estate law.Mercer Capital looks forward to reconnecting with friends and meeting new colleagues in Denver. For more information about the 2026 Fall Meeting, visit ACTEC’s event website.
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