Taxation & Estate Planning

NO VALUATION DISCOUNT FOR RMA'S

By Charles Rubin

A restricted management account (RMA) is an account under which the owner of cash and/or securities places those items in the hands of an investment manager to manage for an extended period of time. The account agreement usually provides that the items will be kept under such management for a fixed number of years. This allows the account manager to make long term investment decisions, and thus to put less focus on short term profits to retain client business.

Some assert that an ownership interest in an RMA is worth less for gift and estate tax purposes than the assets held in the RMA, by reason of the obligation to keep management with the investment manager for a fixed period of time. The IRS has now issued a Revenue Ruling that such valuation adjustments are inappropriate.

One leg of the IRS position is that a willing buyer would not reduce what they would pay for the underlying assets by reason of them being bound by this management restriction, and thus the willing buyer/willing seller test for value does not justify a reduction. However, if you ask yourself the question, would you pay the same for $1 million dollars in securities that are under such a restriction and as you would pay for $1 million dollars that are not under such a restriction, it seems obvious that you (or any other willing buyer) would pay less in the first circumstance. It doesn''t take a professional appraiser to question the validity of the IRS' conclusion.

The other argument of the IRS is that no reduction is allowed per Code §2703(a)(2). This provision provides that for federal estate, gift, and generation-skipping transfer tax purposes, the value of any property shall be determined without regard to any restriction on the right to sell or use such property, and thus the account management agreement should not give rise to a valuation adjustment.  However, under Code §2703(b), Code §2703(a)(2) will not apply if to a restriction (1) that is a bona fide business arrangement; (2) that is not a device to transfer property to members of the decedent's family for less than full and adequate consideration in money or money's worth; and (3) whose terms are comparable to similar arrangements entered into by persons in an arm's length transaction. The Ruling concludes that this exception does not apply, but provides no convincing argument or precedent why the exception could not be valid in many circumstances.

Therefore, while the Ruling will result in challenges to valuation adjustments taken for RMA's, whether the IRS is correct on this issue is probably still an open question.

Revenue Ruling 2008-35, 2008-29 IRB 116.

Full post as published by Rubin on Tax on July 23, 2008 (boomark / email).