re: Avoiding the inheritance tax

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I was talking to a client of mine that owns an oil company in Houston. I was asking him about his estate planning and whether or not I should recommend someone for him to meet. He told me that his CPA said he does not have an estate tax problem because most of his wealth is tied up in oil and gas under the ground. Since it under the ground and they really don't know how much is there then they can't put a value on it. I found that strange, but he insisted.

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So what you are saying, is bury all my assets....


It's genius...

At least 40%. Depending on the assets, a fair value/nav discount (rarely over 10%), a minority discount (large range, could be 3 could be 20) and of course, the gift that keeps giving, the marketability discount @ 25-35%. I've done a lot of FLP work with private equity and restricted stock holdings, those end up with like 60% all in discounts because the discount to nav on those assets from their indicated values is typically large (relative to a portfolio of common stock, for instance).

Some of the higher ups here are definitely concerned about the future of allowed discounts, but like the threshold discussion earlier, that's more of a political question really. VPs and MDs will push the discounts to where they feel comfortable pushing them based on their experience, but at the end of the day the people who run the place are the ones that get up on the stand and defend our reports. Fortunately they've been doing it for decades, and given the endless stream of work I have and the reasonably good compensation, it doesn't appear that we lose hardly ever, if ever. I don't really follow the outcomes of each project, but it seems like the IRS basically low-ball's the discounts every time, then just settles. According to the last company-wide meeting we had on this, the recent trend for our clients is for courts to be on our side of the average of the IRS discount and our discount in the cases where they don't just fold completely. I'm not sure if that's a national trend or not though. Our stuff is grounded in Daubert-tested and accepted financial theory and backed by what I will call (as the person who ends up writing most of it) stupifingly long and detailed explanations in our reports, which is good obviously from a client perspective, and why we charge premium fees. One of the reports I'm working on right now is going to end up being close to 400 pages. I honestly think the IRS agents just look at it, go LOL frick that, then move on to an easier fish sometimes.

They're not all that long, I'd say the average FLP report with just some marketable securities is like 50. I can pretty much roll through one of those in a day now if I actually work straight through (which I don't ever do because its impossible). Throw in some hedge funds or PE LP interests and it grows by another 20. Throw in an opco and tack on another 60 if its not that big (<$100MM or so). But some of them are just monsters though. FLPs are generally boring though, they only get fun when they have opcos or something a little more alternative like restricted stock or carried interest. Carried interest shite is ridiculous. Luckily we do a lot of other valuation work outside of run of the mill FLPs, otherwise I'd be out of here asap.

I'm pretty sure that "Memoires of a CFA" wouldn't be a national bestseller. Unless it was embellished with Enronesque antics, stippers, and snow.

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I've done a lot of FLP work with private equity and restricted stock holdings, those end up with like 60% all in discounts because the discount to nav on those assets from their indicated values is typically large (relative to a portfolio of common stock, for instance).

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The IRS is going to come after just about anything over 40%. They don't even like 40%, but it seems that's what has passed court scrutiny.

Like I said, you can get greedy, but be prepared to pony up some $$$$'s to a team of tax lawyers.

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Solid advice. I was considering asking him if he wanted to have a sit down with me and his CPA in the same room. Do you think that's too far?

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frick NO! Have a sit down talk first with just him and your Mom! Leave the CPA out of the picture now unless he brings it up. If you do, you are a little shithead.

I'm going thru this with my kids right now. The law now stands at gift giving at $10K a year per kid without and taxes. As for as land value, one can make up a price on that shite to a point. One can't get real dumb pricing land though.So, I been turning over the land in big size chunks at a time to them each year. Now, myself, I was able to pull moneys here and there over time without getting my arse taxed and putting the money away. I know it is not working now, but I will be able to just give the moneys to my kids without being taxed. I'm in poor health now, still young (54) and the wife will need help taking care of later in life with money planning. So, I been putting all my cards on the table to the kids and wife.


It was a very hard thing to do before my Mom passed away, but was able to get her to turn things over to me and my brothers and sisters before passing away. Planning is a must for everyone.

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The IRS is going to come after just about anything over 40%. They don't even like 40%, but it seems that's what has passed court scrutiny.

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I can definitively tell you not a single project I've worked on has come out with an all-in discount below 40.

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Like I said, you can get greedy, but be prepared to pony up some $$$$'s to a team of tax lawyers.

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We're not greedy, we just take high risk audit clients. The team of tax lawyers you're referencing here hires us.