Importance of Valuing Assets

1
Importance of Valuing Assets

• 1st Determine liquidity needs of the estate
• 2nd To plan ..
• - should I make lifetime gifts
• - should I make charitable bequests
• 3rd Buy / Sell Agreements

Do we want a LOW value or a HIGH Value?
2
Valuation Dates

• Date of Death
• Alternative Valuation Dates 6 months later
• Use sale price within the 6 month window if
  Alternative Date is chosen

Value price property would change hands between
a willing buyer and a willing seller neither
being under a compulsion to buy or sell.
Highest and Best Use
3
Real PropertyFactors in the Value (page 252)

• Location .. including highway access
• Condition of the property (topo)
• Zoning .. potential use . Is property
  entitled.
• Condition of Building
• Environment Problems (phase 1 / phase 2
  environmental)
• Income Potential (cap rates)
• Comparable Property (comps)

4
Special Use ValuationParticularly applicable to
Farms and Closely-Held Business

• Note definition of Farm
• Reduction in value limited to 900,000
• Rules
• US Citizen or Resident
• gt 50 of Gross Estate
• gt 25 of Net Estate
• Must pass to a Qualified Hier . lineal
  descendent
• Must have owned for 5 of 8 years
• Materially participated in the business for 5 of
  8 yrs
• Continue in special use for next 10 years
  (recapture)

5
Recapture of Special Use Tax Benefit

• Property is disposed of within 10 years
• Qualified heir must materially participate for 10
  years . exception for fiduciary.
• If Recapture is triggered additional tax
  results with a stepped up basis in property.
• Advance Planning to meeting the 50 test and the
  25 test is

6
Valuation of Personal Property

• Do a room by room inventory
• Household goods are presumed to be the husbands
  (common law states)
• Listed stocks .. Average of highest and lowest
  trading prices
• Stocks with no float . use nearest dates
• Large blocks of stock (no control).. Discount
• Large blocks of stock (control) . Possibly
  increase.

7
Valuation of Personal Property

• Corporate Bonds quoted price for listed bonds.
  What if bonds are not publicly traded??
• US Government Bonds (EE) .. at redemption price.
  These bonds cannot be sold . only redeemed.
• Flower Bonds redeemed at par if used to pay
  estate taxes
• Life Insurance death proceeds assuming the
  decedent is the insured
• What if the decedent owns a policy on the life of
  someone else?? CSV plus the unearned amount of
  the last premium.

8
Closely Held Corporations

• Get an Appraisal ..
• This is an art .. not a science
• Rev. Rul. 59-60 reaffirms that no fixed formula
  or valuation can be devised that is applicable to
  all situations .. FMV must be determined on an
  individual basis.
• Two methods
• Adjusted Book Value
• Capitalization of adjusted earnings

9
Adjusted Book Value

• Asset based (versus net income)
• Much of the value is in Real Estate
• One person corporation
• Likely to be liquidated as part of the settlement
  of the estate
• Highly competitive business where profits are
  marginal

Adjustments to Book Value could be positive or
negative . Undervalued assets (compared to cost)
or declining profits and liquidity. Also
potential liabilities would influence value.
10
Capitalization of Earnings

• Select a cap rate
• Project sustainable earnings
• Multiply the cap rate by the earnings
• How long will it take me to recover my capital?

11
Example Cap Rates

• Company A earnings are 100,000. Investor
  requires a 20 return on the investment (20 cap
  rate). How much does he offer for the business.
• Same problem 12
• Same problem 8
• Same problem 5

12
Adjustment to Income Valuation Approach

• Add back bonuses
• Add back excessive salaries (or subtract
  unrealistic low salaries)
• Adjust for excessive rents
• Adjust earnings to reflect earnings trends
• Adjust earnings for excess depreciation
• In other words, are there things about the
  business that would be different with new
  ownership??

13
Minority Interest

• If valuing a business for a shareholder who has
  a minority interest, discount the value of the
  shares for lack of control. Discounts from 10
  to 30 are often allowed .. I have seen them up
  to 40.
• Majority control can result in a premium to the
  shares.

What would someone pay for the business?? What
would someone pay for 10 of the business?
14
Restrictive Stock

• Buy Sell Agreements .. These can actually set
  the price if an enforceable agreement for
  repurchasing the shares is in place. Note an
  arrangement among Family members will be
  scrutinized. Must be arms length.
• Generally, some discount for lack of
  marketability in private stocks.

15
Estate Freeze

• What do we know about Common Stock?
• What do we know about Preferred Stock?
• How does the value of common stock change
  compared to the value of preferred stock?

16
Estate Freeze
Parent / Owner (common stock) (preferred
stock) retained
Children (common stock)
gifted
HOLDING COMPANY
Family Business 100K FMV
17
Estate Freeze

• How does (did) the subtraction rule work in the
  case of an Estate Freeze??
• Do we still use the subtraction rule for Estate
  Freezes? What are qualified payments?
• Applies to Family Transactions
• Effects the value of the Gift