Valuing the Estate
How Much Is It All Worth?
Of course, it’s impossible to begin planning without knowing what everything in the estate is worth. Whether deciding how to divide assets in a will, calculating how to minimize taxes, or determining the best way to provide for family members, a business owner will first need to know the value of the estate.
Assets take their “fair market value” on the date of death or on the alternate valuation date, which is usually six months after the date of death. (The executor can elect the alternate valuation date for the entire estate if it will result in a decrease in the value of the gross estate and therefore a decrease in the federal estate tax due.)
Fair market value is assessed by determining “the value at which a willing buyer would buy and a willing seller would sell, with neither of them under any compulsion to buy or sell, and both having reasonable knowledge concerning the asset.”
Valuation of Some of the Basic Assets
- Real estate. Clients must disregard any “assessed value” for the purposes of local property taxes and rely solely on the fair market value of the property.
- Personal property (including jewelry, cars, etc.). Fair market value is always the retail price, not the wholesale price. Any item over $3,000 or any group of items over $10,000 requires an expert appraisal.
- Securities. Whether traded on an exchange or over the counter, securities take their fair market value on the date of death or the alternate valuation date. In this case, fair market value is the arithmetic mean between the highest and lowest selling prices on the specified date. (If no sales took place on that date, the executor must use the nearest sales before and after the valuation date.)
Valuation of Life Insurance
The decedent’s gross estate includes the proceeds payable at death from a life insurance policy on the decedent’s life only if the proceeds are payable to the estate or if the decedent held any incidents of ownership in the policy within three years of death. Even if the decedent gifted the policy to someone else, if the decedent retained any of the following rights within three years of death, the value of the policy is included in the estate:
- the right to change the beneficiary
- the right to surrender the policy for cash
- the right to borrow against the policy or pledge it for a loan
- the right to assign the policy
- the right to elect or revoke a settlement option
- the right to get the policy back after a transfer (reversionary interest)
- the right to convert group coverage to an individual contract
- the right to exercise any other important right or power under the policy
When a decedent owns a life insurance policy on the life of another person, the fair market value of the policy is also included in the gross estate. For a paid-up policy, this means the replacement cost of a comparable policy. For any other type of policy, the value is the “interpolated terminal reserve value,” which is approximated by (but not identical to) the cash value plus a prorated portion of any unearned premium.
Valuation of Annuities
For annuities whose payments cease at the decedent’s death, there is obviously no value to be included in the decedent’s gross estate.
On the other hand, if the payments continue to be paid to a beneficiary, the gross estate will include the present value of the future payments.
This rule also applies to annuities paid from IRAs, tax-sheltered annuities, retirement plans (both qualified and nonqualified), and similar deferred compensation arrangements.
Valuation of Closely Held Stock
Closely held stock refers to stock that is not publicly traded and is held by one owner or a small number of owners. Business owner clients will typically hold closely held stock. The valuation of this asset is subjective and will require an expert appraiser.
The IRS has identified several factors that an appraiser must take into account:
- the type of business and its earning history
- the economic outlook (for the country, the industry, the company)
- the book value of the stock
- the profitability of the company
- the company’s goodwill
- the size of the block of stock relative to all outstanding shares
- the price of comparable publicly traded stock
- the company’s ability to pay dividends
- any previous sales of the stock
Some business owners enter into a buy-sell agreement to ensure their stock will be sold when they die. We will discuss buy-sell agreements in detail in Chapter 3, but most buy-sell agreements set a price for the eventual sale of the stock or a formula for determining the sale price at the time of the owner’s death. For the IRS to accept this price as the proper estate tax value of the shares, the price must approximate the fair market value of the stock at the time the agreement was made.
Valuation of Partial Interests
Partial interests of estate property include life estates, remainder interests, reversionary interests, and annuity interests in property. In other words, when the decedent owns part of a property and ownership is split between two or more people, this partial ownership is included in the estate. In these cases, the individual value assigned to each person’s interest must, when added together, equal the whole value of the property.
The IRS provides valuation tables for this purpose that take the time value of money into consideration.
Valuation of Farm and Business Real Estate
Real estate is valued according to its highest and best use. In other words, if a piece of land is worth $500 per acre when used by the farm or business, but would be worth $4,000 per acre to a developer, the property would take the higher valuation.
However, there is an exception for real property used by a closely held business or farm. Special use valuation allows the executor to use the value of the real estate based on its current use instead of its highest and best use. Of course, the IRS has certain conditions, and there is a maximum allowable reduction in value that is indexed for inflation.
Special use valuation can be very important to business owners. It can ease both the estate tax burden and the liquidity needs of the estate, often allowing the property to remain in the family or in the family business.
There is a caveat, though—if the heirs sell the property outside the family or stop using it for farming or business purposes (likely reaping a windfall by selling at “highest and best use” prices), the IRS can recapture the tax benefits.
At Islamic Wills Trust Services we have a team of experienced attorneys who can help you set up an Islamic living trust tailored to your unique needs and circumstances. Contact us today to learn more about how we can assist you in protecting your assets for generations to come.
Schedule your free consultation in our offices in Maryland and Virginia in your house or online. We’re also available to meet on weekends and after working hours. You may schedule your consultation by calling us at 855-559-4557 or by emailing us at yasir@islamicwillstrust.com. Appointments are typically scheduled two weeks in advance.