Usually when there is talk of a limited partnership structure in an estate plan, the individual or family is seeking to simplify an otherwise cumbersome process of gifting hard-to-value or hard-to-divide assets such as real estate, marketable securities, closely held businesses, or perhaps, even assets of a more peculiar nature. Of course, another benefit of this “simplification” can be a reduced estate and/or gift tax.
The typical valuation begins with a top-down analysis of the inventory of assets and liabilities inside the partnership. Underlying asset values are individually appraised by qualified experts or asset values are observed in the markets in which they trade. This part of the analysis establishes the aggregate net asset value of the limited partnership. Moving from this point to the conclusion requires a careful processing of what can be a large amount of additional information:
Answers to these and similar questions help us to interpret the economics of the limited partnership interest and can help lead to a reasonable quantification of what are commonly referred to as minority and marketability “discounts”. The most important part of the limited partnership valuation analysis is quantifying appropriate discount adjustments. Discounts deserve careful support, which can be obtained from a variety of sources:
Valuing a limited partnership interest can be complicated and time consuming. Whatever the level of complexity, careful documentation of the valuation process will benefit users of limited partnerships. There is a sound and reasonable framework for valuation, but there is no standard formula. Please call for more information or to discuss a valuation issue in confidence.
Reprinted from Mercer Capital’s Value AddedTM – Vol. 7, No. 4, 1995.