The value of your assets is important at nearly every stage of your estate planning process. Knowing the value of your estate in terms of it gross value, which is the total value of all your assets added together, and its net value, which is the gross value minus any debts, can help determine what type of planning will best meet your needs. However, value is not a stagnant concept and precise valuations can be difficult to come by.
Clearly, determining the gross value of your bank accounts is a simple task, although on any given day it is simply a snapshot of your financial picture. The value of your real estate might be fairly ascertainable from commercial websites showing sales in your neighborhood of comparably sized homes. However, for other assets, any attempt at valuation might be a shot in the dark. If you own your own business, for example, or have many rare or one-of-a-kind assets like antiques or paintings, it may be more difficult to ascertain the value of your items.
Michael Jackson’s estate is in the news again as the most recent example of an asset valuation problem. The IRS has issued a Notice of Deficiency showing a shortfall of $702 million against the late King of Pop’s estate, which is being argued in the U.S. Tax Court. In his case, the controversy is primarily regarding the rights to intellectual property and likeness, where the IRS contends the estate substantially undervalued its future earning potential for estate tax purposes. Interest and penalties balloon the amount due and may comprise as much as 40% of the total amount due!
Essentially, the IRS is asking the estate to prove what it valued Michael Jackson, as a business, and how it arrived at that value. The future earnings could be evaluated in a number of different ways, but would include assessing past earnings patterns, merchandising opportunities, future musical compilations, and more. Although the estate has been extraordinarily successful, they argue there was no way to predict that Michael Jackson’s death would spur such income generation given that his income was declining in prior years.
In your case, if you own a business, similar valuation problems may exist. Whether your business can be transferred easily or relies on your presence is one key issue when determining value. Other issues may include the amount of outstanding liabilities, capital assets, and ongoing contractual obligations. Appraisers are essential to proving up the valuation you claim. Even when your estate does not exceed the estate tax threshold, the correct valuation may be essential for capital gains purposes, gift tax returns, and A-B trust splits. Furthermore, when attempting simplified probate procedures used in small estates, it may be necessary to prove that certain assets are of a sufficiently low value to qualify. Understanding when and how to use appraisers when transferring assets or determining value is essential to ensuring that your plan will meet your needs and be administered properly.
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