Ch 4 - Valuation Principles In Estate Planning Flashcards
What is a frequent reason for litigation of taxes?
Valuation
Tax court - assessed taxes need not be paid
Federal District Court - assessed taxes must be paid first but jury trial is available
Federal court of claims - assessed taxes must be paid first
The 3 forums for tax disputes are:
Tax code
Tax regulations
Tax rulings
IRS Publication
What are the 4 sources of valuation rules:
Price at which a willing seller and willing buyer who are fully informed and under no compulsion to buy & sell would exchange the property
What is fair market value valuation?
Date of death is normally used Value 6 months later can be used if:
- Asset does not decline in value due to passage of time
- Asset sold in interim is valued at time of sale
What is alternate valuation date
Highest & best use or Special use value for qualifying real estate
How is real estate valued
Comparable sales Adjusted for appropriate distinctions
Capitalization of income
Net income capitalized at a fair rate of return
Replacement cost less Physical deterioration
Functional obsolescence
Economic obsolescence
How is the dollar value of real estate determined
What is special use valuation
Applies only to qualifying estates Does NOT apply to gift tax value
Max reduction is 1,070,000 Qualifying estate only Family business or farm before & after
What are the qualification rules for special use valuation
Citizen of US
Irrevocable election
50 % of AGE in business or farm
25% of AGE in special use real estate
What is a qualifying estate for special use valuation
Owned & used in qualifying use in 5 out of 8 years
Passed to qualified heir
What is a qualifying family business or farm for special use valuation
Failure of qualified heir to use in a qualified way 5 out of 8 years in the 10 years following death
Disposition of property without meeting test above
How are special use benefits recaptured
Amount included is
- Left to a survivor
- Provided by funds from decedent or employer
- Value is Replacement cost if provided by insurer
- Actuarial value otherwise
How is an annuity valued
Date of death/alternative valuation date
FMV per share on established market/exchange
Mean between the highest & lowest price for the day of valuation
How is specific property of Publicly traded stock /corporate bonds determined
Date of death redemption
How is specific property of US Government bonds determined
Book value - adjusted Capitalization method
Discounted future earnings
Pegging in buy sell agreements
What are the methods of valuing closely held businesses
Goodwill
Earning potential
Asset potential
Economic outlook for industry
Position in the industry
What are the 5 ways a going concern are measured
Minority interests
Lack of marketability
Closely held Blockage discount
Liquidation discount
What are the 3 potential discounts for business valuation
10/9/90
When did family buy sell agreement rules change
Bona fide business purpose
Not a device to transfer to family for less than full consideration
AND comparable to similar arms length agreements
Purchase price provisions can be used in family buy sell agreements if
Failure to update fixed Price
Failure to consider the value of life insurance funding an entity/stock redemption type of agreement
Failure to value goodwill
Failure to apply discounts
4 common errors in buy sell agreements
Fixed price with periodic update
Formula provision
Independent appraisal
Hybrid combination method
4 types of valuation methods used in buy sell agreements
Concurrent interests
Non concurrent interests
How are partial interests valued
Terms life estates annuities remainders and revisions
Discounted by 120% of AFMR use of most recent mortality tables
Mortality tables could be ignored for health impairments
How are non concurrent interests valued
