A client recently passed away who owned several non-publicly traded, smaller company shares of stock, limited partnership interests and membership interests in LLCs. These are often referred to as closely-held entities. Since the shares are not publicly traded on a stock exchange, they are largely illiquid; that means one can’t easily convert the investments into cash. Generally speaking, these types of assets are difficult to deal with when a client becomes incapacitated or dies. The more information you provide to your estate planning attorney while you are alive and well, the better.

In this particular case, my client never informed anyone at my firm that he owned these shares. We knew nothing about these businesses. We could not locate evidence of the purchase price, exactly how many shares he owned, or even who the primary contact would be to advise the company of our client’s death. It took several hours of investigative work, as well as combing through his paper files, to find out much of anything to do with the shares. If the client maintained records electronically, we could not access them as we didn’t know which account, username or password we might access.

Further, many closely-held business interests are governed by a shareholder, partnership or operating agreement that restricts the transfer of the shares to another and might establish a specific purchase sequence in the event of the disability or death of the shareholder, partner or member. If there were any such agreements that governed our client’s ownership of the assets, he never provided them to us.

To properly report taxes, it’s necessary to know the fair market value of the shares as of the client’s date of death. This is because the federal (and state level) estate taxes are based upon the date of death fair market value of all assets, including closely held shares. Even if the deceased’s estate is not large enough to trigger a federal estate tax, for capital gains reporting purposes it’s necessary to know the date of death fair market value of shares so that when they are subsequently sold the capital gains taxes are minimized.

Each of our estates receive a step-up in tax cost basis equal to the date of death fair market value. Since small businesses and partnerships have no ready market, it’s often difficult, if not impossible, to determine the shares’ fair market value on any particular shareholder’s date of death. Conducting a valuation of the company is expensive. Therefore, most companies won’t engage a valuation specialist every time a shareholder dies, unless it’s a family business and most of the other shareholders are family members who have a vested interest in the date of death fair market value.

Sometimes the company will provide recent sales transactions as the best estimate of a closely held interest. Those transactions, however, may be several years old and of little use to the estate, particularly where the business’ performance has materially increased or decreased from the year of the most recent sale.

If you own closely held business interests, it always makes sense to provide your estate planning attorney a copy of:

  • The share certificate or other evidence of ownership;
  • Purchase price and date, including a copy of the purchase agreement (if there was one);
  • Sales prospectus and closing statements relative to the purchase of the interest;
  • Articles of Incorporation, Bylaws and other relevant corporate documents;
  • Shareholder, partnership or membership agreements including amendments;
  • Name and contact information for the company’s registered agent;
  • Correspondence regarding the ownership interest or significant transactions involving the business;
  • Any valuation reports, no matter how current; and/or
  • Any other written information that could be of value to your estate.

This, at least, provides a base of knowledge from which your estate can piece together the information that will be necessary in the event of your disability or passing. After all, we want you plan to be up-to-date when you need it most!

© 2019 Craig R. Hersch. Originally published in the Sanibel Island Sun.