1. ©2015, College for Financial Planning, all rights reserved. Session 3 Valuation of Transferred Assets for Gift and Estate Tax CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAM Estate Planning

2. Session Details 3-2 Module3 Chapter(s)1 LOs3-2 Analyze a situation to identify factors that would be relevant in determining the value of estate assets. Module4 Chapter(s)1 LOs4-2 Describe the purpose and basic features of the special valuation rules under IRC Chapter 14. 4-3 Analyze a situation to identify factors that would be relevant in determining the value of gifted assets.

3. Valuation of Transferred Assets Dates of Valuation Estate tax o Date of Death (DOD) o Alternate Valuation Date Elective 6 months after DOD Must be applied to all assets except those that decline with the passage of time Must reduce gross estate Must reduce net estate tax due Exception for assets sold before six months after DOD Gift Tax o Date of completion of the gift Donor cannot change disposition 3-3

4. Valuation of Transferred Assets: Discounts valuation method used for large block of publicly traded stock that cannot be marketed without adversely affecting the price Blockage discount discount resulting from inability of closely held business interest to control business decisions Minority interest discount value added when percentage of business transferred represents control Control premium applied to real estate that has impaired marketability because estate cannot sell its partial interest or purchase co-owner’s partial interest Co-ownership (fractional interest) discount discount to reflect loss of person who is vital to business operations Key person discount discount for restrictions on marketability and costs of taking public a closely held business Lack of marketability discount 3-4

5. Exceptions to FMV Estate tax Special Use Valuation Elective Applies only to real estate used in a closely held business or farming operation Allows real estate to be valued at current use value rather than FMV FMV of property cannot be reduced by more than $750,000 (inflation indexed) 3-5

6. Valuation of Transferred Assets Special Use: Section 2032A Conditions for Election The decedent was a U.S. citizen or resident at death. The real property is located in the United States. The real property: o is passed to a qualified heir. o was being used for a qualified use by the decedent or a family member at the time of death, and for a total of 5 of the 8 years prior to death. o was owned by the decedent or family members for a total of 5 of the 8 years prior to death. 3-6

7. Valuation of Transferred Assets Special Use: Section 2032A Conditions for Election There was material participation by the decedent or a family member in the operation of the farm or business for a total of 5 of the 8 years prior to the decedent’s death. The 50% and 25% tests are met. The required agreement is signed and submitted by all heirs with interests in the property. 3-7

8. Chapter 14 Rules Section 2701 Applies to valuation of a gift of a closely held business interest between family members when transferor retains an interest in the entity If interest retained by transferor is a liquidation, put, call, or conversion right that must be exercised at a specific time and amount; or a distribution right (but only if immediately prior to the transfer, the transferor and applicable family members hold control of the entity) that will pay income that is fixed in both time and amount, it is deemed to be qualified, and can have a positive value that is deducted from the FMV of transferor’s interest in entity prior to transfer in computing transferor’s gift tax If the liquidation, put, call, or conversion right is discretionary or the distribution right (as qualified above) will pay income that is not fixed in time and amount, it is an unqualified retained interest and must be valued at zero, requiring the transferor to pay gift tax on the FMV of transferor’s interest in the entity prior to the transfer 3-8

9. Chapter 14 Rules Section 2702 Applies to valuation of a transfer of an interest in trust (or equivalent) to a related family member in which transferor retains a beneficial interest. If interest retained is an annuity, unitrust, or noncontingent remainder interest (where all income interests are annuity or unitrust interests), it is deemed to be qualified, and can have a positive value that is deducted from the FMV of transferor’s interest in trust assets prior to transfer in computing transferor’s gift tax. If interest retained is unqualified, it must be valued at zero, requiring transferor to pay gift tax on the FMV of transferor’s interest in the trust assets prior to transfer. Exceptions are: QPRT, CRT, PIF, CLT, and QDOT transfers in trust deemed to be for full and adequate consideration in a divorce, and when the remaining interests in the trust are retained by the other spouse. 3-9

10. Chapter 14 Rules Section 2703 Applies to gift and estate tax valuation of property subject to an agreement, option, or other right to acquire property at less than fair market value, or any restriction on the right to sell or use property. Such rights and restrictions are ignored in valuation unless the transaction is 1.a bona fide business arrangement; 2.not an attempt to transfer property to family members for less than full and adequate consideration; and 3.similar to an arm’s-length transaction. A right or restriction is presumed to meet each of these requirements if more than 50% by value of the property subject to the right or restriction is owned directly or indirectly by individuals who are not members of the transferor’s family. 3-10

11. Chapter 14 Rules Section 2704 Applies to a lapse of any voting or liquidation right in a closely held corporation or partnership in which the holder of such right and members of the holder’s family hold, both before and after the lapse, control of the entity. The lapse will be treated as a gift by the holder (or included in the holder’s gross estate) as measured by the excess in value of all interests in the entity owned by the holder immediately before the lapse (determined as if the rights were nonlapsing) over the value of such interests immediately after the lapse. 3-11

12. Valuation of Transferred Assets: Life Insurance Valued at replacement cost Life insurance owned by decedent on the life of another Valued at death benefit Life insurance owned by decedent on his or her own life Unused premium Replacement cost for term policy Interpolated terminal reserve plus unused premium Replacement cost for cash value policy 3-12

13. Valuation of Transferred Assets: Publicly Traded Stocks & Bonds If other purchases of the stock or bond were made on the valuation date (or, if the valuation date is a Saturday or Sunday with purchases on the preceding Friday and following Monday): The stock or bond is valued at the mean between the high and the low selling price on the valuation date (or on the preceding Friday and following Monday). Example: If the high selling price for the stock on the valuation date was $15 per share, and the low was $13, the price of $14 per share represents the stock’s FMV on the valuation date. The stock’s FMV would also be $14 if the valuation date was on a Saturday or Sunday that was not a trading day, the mean selling price on the preceding Friday was $15 per share, and the mean selling price on the following Monday was $13 per share. 3-13

14. If there were no sales on the valuation date (or, if the valuation date is a Saturday or Sunday, and there were no sales on the preceding Friday and following Monday): The stock or bond’s value is a weighted average of the means of sales of the stock or bond on the nearest trading dates before and after that date. Example: Assume that the valuation date is June 15 and that there were no sales of the stock or bond in question on this date. Assume further that there were sales of the stock or bond two trading days before the valuation date at a mean selling price of $10 per share, and sales of the stock or bond three trading days after the valuation date at a mean selling price of $15 per share. The FMV of the stock or bond as of the valuation date is $12 per share computed with this formula: 3-14 Valuation of Transferred Assets: Publicly Traded Stocks & Bonds

15. Question 1 The general valuation principle for the federal estate tax is the fair market value of the asset as of the valuation date. True False 3-15

16. Question 2 The Chapter 14 Rules apply to both gift and estate taxation. True False 3-16

17. Question 3 A minority discount for estate tax purposes is applicable only when the decedent owned less than 50% of the stock of a publicly held corporation. True False 3-17

18. ©2015, College for Financial Planning, all rights reserved. Session 3 End of Slides CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAM Estate Planning