Estate Planning Chapter 10

Front 1

Why Valuation is important to the Estate Planning Process

Back 1

(1) Liquidity Needs
(2) Establishing gift programs
(3) Funding of Buy-Sell Agreements

Front 2

Date for Federal Estate Taxes

Back 2

(1) Day of death
(2) Alternate valuation date
(3) Date of sale, exchange, distribution, disposal

Front 3

Alternate Valuation Date

Back 3

The date 6 months after the decedent's death that may be used for estate tax valuation purposes allowing for fluctuation in value

Property sold, distributed, exchanged, or otherwise disposed within this period is valued on the date of its disposal

Front 4

Valuation for assets that decrease in value overtime

Back 4

Valued at the date of death, even if alternate date applies, for assets that inherently decrease in value overtime (i.e., annuities)

Front 5

Fair Market Value

Back 5

Price at which the property would change hands between a willing buyer and a willing seller, both having reasonable knowledge of relevant facts; valuation of asset based on hypothetical sale

Front 6

Factors deciding to what extent sales price is indicative of value

Back 6

(1) Frequency of sales
(2) The relationship between the seller and buyer
(3) Options to purchase or sell (as opposed to offers)

Front 7

Specific Problems in Valuation

Back 7

(1) Different markets for the same property
(2) Comparable sales analysis is subjective
(3) Property needing valuation is unique and valuation is subjective

Front 8

Valuation of Land

Back 8

If no market for the land, the greater of:
(1) The highest price available
(2) The salvage value (disposal)

If market available:
(1) Size, shape, location
(2) Nature and condition, physical qualities, improvements
(3) Actual and potential use and how it is affected by development and economic conditions
(4) Suitability of property for actual or intended use
(5) Zoning restrictions
(6) Age, size, condition of buildings
(7) Market value of other properties in area
(8) Environmental factors
(9) Value of rents received
(10) Prices of comparables sold recently
(11) Cost to duplicate after depreciation
(12) Value accepted by state probate courts for purposes of state death taxes if based on appraisals made by qualified real estate experts
(13) Unusual facts

Front 9

Special Use Valuation

Back 9

Election available to value certain real property by taking into consideration how the property currently is utilized instead of how it might be used if placed in its best and most profitable use (cannot reduce value by $1,070,000 in 2013)

Front 10

Requirements for Special Use Valuation

Back 10

(1) Decendent US citizen or resident
(2) Must constitute at least 50% of decedent's gross estate after certain adjustments for mortgages and liens
(3) Net value of real property qualifying for the special use must constitute at least 25% of the adjusted gross estate value
(4) The real property in question must pass to qualified heir (essentially, lineal descendant of decedent's grandfather)
(5) Decedent or family member must have owned it at least 5 out of the 8 years immediately prior to death
(6) Decedent or family member must have materially participated in the operation of the farm/business for at least 5 out of the last 8 years immediately prior to death
(7) Property must continue in its special use by qualified heirs for 10 years after decedent's death

Front 11

Farm-Method Formula of Valuation

Back 11

A special or limited use valuation of land used for farming purposes, used if no comparable land from which the average rentals can be determined

(Gross Rental - Taxes) / (Interest Rate for FLB loans)

Front 12

Recapture

Back 12

A provision that reclaims the tax benefits derived from certain favorable tax treatment Code sections if and when specific qualification requirements of the particular Code section are violated

Front 13

Exception to Recapture Rules

Back 13

Involuntary conversion or exchange or real estate in like-kind exchange

Front 14

Valuation of Household and Personal Effects

Back 14

Use willing buyer- willing seller rule

In non-community property states, household goods and acquired during marriage are presumed to be property of the husband (included in husband's estate)

Front 15

Willing Buyer-Willing Seller Rule

Back 15

Tthe price at which a WB and WS would exchange, neither being under any compulsion to do so, and both being informed of the material facts surronding the transaction

Front 16

Valuation of Listed Stocks

Back 16

Mean between the highest and lowest quoted selling price on the valuation date

If no trades on death date: a weighted average of the means between the highest and lowest sales on the nearest date before and the nearest date after the valuation

Front 17

Valuation of Coporate Bonds

Back 17

Use the means of the selling prices on or near the applicable valuation date; in the absence of sales or B-A prices:
(1) Ascertaining the soundness of the security
(2) Comparing the interest on the bond to yields on similar bonds
(3) Examining the date of maturity
(4) Comparing prices for listed bonds or corporations engaged in similar types of business
(5) Checking the extent to which the bond is secured
(6) Weighing all other relevant factors (analysts, outlooks, economy, etc.)

Front 18

Flower Bonds

Back 18

Fixed income bonds that were originally purchased at a discount in anticipation of federal estate taxes; when the bondholder died the bond matured at par value and were used to pay estate taxes.

Front 19

Valuation of U.S. Gov't Bonds

Back 19

EE bonds valued at their redemption price (market value) at the date of death; certain US treasury bonds (flower bonds) may be redeemed at par value if used to pay federal estate taxes

Front 20

Valuation of Life Insurance (for unmatured policy by a decedent on another life)

Back 20

(1) If new- gross premiums paid
(2) If paid up single premium- replacement cost
(3) Premium paying whole life- unearned portion of the last premium to the interpolated terminal reserve
(4) Term policy- unused premium

Front 21

Criteria Used to Define Closely Held Stock

Back 21

(1) Limited number of stock holders
(2) Restrictions imposed upon a shareholder's ability to transfer the stock
(3) The absence of an exchange listing or regular quotation in the OTC market
(4) An irregular and limited history of sales or exchanges

Front 22

Considerations of Rev. Rul. 59-60 for Valuation of Closely Held Stock

Back 22

(1) Nature of business and entire history of enterprise
(2) Economic outlook in general as well as the outlook of the industry
(3) Book value of the stock and financial condition of business
(4) Earning capacity
(5) Dividend paying capacity
(6) Goodwill
(7) Prior stock sales and size of the block
(8) FMV of stock of comparable corporations

Front 23

Goodwill

Back 23

The economic advantage or benefit beyond the mere value of the capital invested due to patronage it receives from constant and habitual customers, position, reputation, etc.

Front 24

Other factors considered by courts when valuing closely held stock (beyond Rev. Rul. 59-60)

Back 24

(1) Values accepted by the IRS when other estates held the same stock
(2) Price for the stock in the decedent's will
(3) The values as determined by an expert witness
(4) The relationships between prices, earnings, and book value
(5) The degree of control of the business represented by the block of stock to be valued
(6) The value of the services of the key individual who has died

Front 25

Valuation Methods used by the IRS for Valuing Closely Held Stock

Back 25

(1) Book Value
(2) Adjusted Book Value
(3) Capitalization of Adjusted Earnings

Front 26

Book Value

Back 26

Stated assets less liabilities, divided by the number of outstanding shares

Front 27

Adjusted Book Value Method

Back 27

Involves adjusting the asset components of a business to an approximate fair market value for each component; particularly important when:
(1) Assets are valued at cost
(2) Assets have been depreciated at a rate in excess of their true decline in value
(3) Inclusion of footnote liabilities
(4) Assets that have been completely written off
(5) Assets such as franchises and goodwill
(6) Difficulties in collecting receivables
(7) Obsolete inventories

Front 28

Capitalization of Adjusted Earnings Method

Back 28

A valuation method in which the value of a closely held corporation is determined by multiplying the adjusted earnings of the business by a factor appropriate for the specific industry at the predetermined valuation date

Front 29

Method of Checking Reasonableness of Cap Method

Back 29

Appeals and Review Memorandum 34 Method (ARM 34)

Front 30

ARM 34 Method

Back 30

(1) Figure a reasonable rate of return on the tangible assets
(2) Subtract that return from the annual earnings figure used
(3) Capitalize profits generated by the intangibles to determine their value
(4) Add the results of the above computation with the tangibles
(5) Divide the total value of the corporation by the number of shares outstanding