Ch 4 - Valuation Principles In Estate Planning Flashcards Preview

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Flashcards in Ch 4 - Valuation Principles In Estate Planning Deck (24):

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:


What is a frequent reason for litigation of taxes?



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



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



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