Estate Valuation Amy C. Floyd, JD Allstate Financial

© 2010 Allstate Insurance Company 10/10 Please note that Allstate Life Insurance Company, Allstate Life Insurance Company of New York or the agents and representatives of those entities cannot give tax or legal advice. The brief discussion of taxes and/or tax related terms in this presentation may not be complete or current. The laws and regulations are complex and subject to change. For complete details, consult your attorney or tax advisor. This material is intended for general educational purposes only.

© 2010 Allstate Insurance Company 10/10 Estate Valuation Valuation is an art, not a science – Each valuation case is unique with little or no precedence to be obtained from earlier cases – In valuation, there are no absolutes and only general guidelines – There is no irrefutable “right” answer – Experts will differ – There are available aids and methods generally recognized and accepted

© 2010 Allstate Insurance Company 10/10 FAIR MARKET VALUE Valuation is based on the concept of Fair Market Value – Defined as “the price at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of the relevant facts”.

© 2010 Allstate Insurance Company 10/10 Price At Which Property Would Change Hands…. Actual sale is the best indicator of value Hypothetical “sale” price – Generally a sale for cash or cash equivalent – If seller receives payments in installments, the price will be artificially inflated to compensate the seller for greater risk, but shouldn’t be considered as part of the “sale” price

© 2010 Allstate Insurance Company 10/10 …Between a Willing Buyer and Willing Seller… State of mind Different from the absence of a compulsion to buy or sell Willing Buyer and Willing Seller are hypothetical persons Both must be considered

© 2010 Allstate Insurance Company 10/10 …Neither Being Under Compulsion to Buy or Sell… If buyer is compelled to buy, price is artificially high If seller is compelled to sell, price is artificially low Court forbids valuation based on compulsion. (Estate of Bright V. United States, 658 F.2d999, USTC 13,436)

© 2010 Allstate Insurance Company 10/10 …Both Having Reasonable Knowledge of Relevant Facts… Hypothetical sale must assume that both buyer and seller have a reasonable knowledge of the facts about the property. – Standard is based on not what is actually known, rather the facts that are discoverable through reasonable investigation

© 2010 Allstate Insurance Company 10/10 Marketplace Includes consideration of the location of the marketplace Type of market – e.g. wholesale or retail Defined by the regulations as the marketplace within which that item is most commonly sold to the public

© 2010 Allstate Insurance Company 10/10 Real Estate Valuation Market Approach – Involves comparison of values of actual sales Income Approach – Project anticipated income – Determine capitalization rate Income of Comparable = Rate Price of Comparable Cost Approach – Reproduction costs less depreciation

© 2010 Allstate Insurance Company 10/10 Valuation of Closely Held Business Interests Fair Market Value Revenue Ruling – Type of Business – Economic Outlook – Net Asset Valuation (Book Value) – Earnings Value/Comparables – Dividend Paying Capacity – Goodwill – Sales of Stock of Company

© 2010 Allstate Insurance Company 10/10 Type of Business Nature of the company – Various industries weight price/earnings ratios differently. Follow standard by industry History of the company – Corporate minute books and stock ledgers reveal past history

© 2010 Allstate Insurance Company 10/10 Economic Outlook View stock in the context of how the financial markets view the overall economy If regional company, look at regional economy Past fluctuations in costs and earnings generally can be explained by reference to the national economy

© 2010 Allstate Insurance Company 10/10 Net Asset Valuation Book value more than historical value of corp’s assets where a liquidation is in process or imminent Should use book value for minority interests or where holding company is involved Book value adjusted for inventory reserves or correcting excess depreciation to arrive at “adjusted book value” or “net asset value” Useful for valuation of investment companies

© 2010 Allstate Insurance Company 10/10 Earnings Value/Comparables 5 or more years of prior earnings should be taken into account Marked trend in earnings is relevant Determine appropriate multiple that investor would pay for earnings (price/earnings ratio) Adjust for non operating assets and nonrecurring events Need at least 3 comparables

© 2010 Allstate Insurance Company 10/10 Dividend Paying Capacity Actual dividend yield may be gross understatement of company’s ability to pay dividends Look at company’s current need for surplus corporate funds

© 2010 Allstate Insurance Company 10/10 Goodwill Goodwill is defined as the excess of earnings over and above a fair rate of return on net tangible assets. Demonstrated earning power is evidence of goodwill.

© 2010 Allstate Insurance Company 10/10 Sales of Stock of Subject Company Prior sales of stock in the subject company should be taken into consideration as one of best indicators of value Look to determine “willingness” of buyer and seller Smaller lots than one being valued should be given less weight. Proximity of sales to valuation date is also important

© 2010 Allstate Insurance Company 10/10 Other Valuation Methods Discounted Future Earnings – Rather than use past earnings data, forecast future prospects from the valuation date forward Discounted Cash Flow – Net profits after tax are estimated for the desired future period – Added to depreciation and amortization – Adjust for loan payments, then present value the cash flow.

© 2010 Allstate Insurance Company 10/10 Discounts Lack of Marketability Minority Interest Hidden Discounts – Liquidation Expenses – Capital Gains Tax – Lack of Comparability

© 2010 Allstate Insurance Company 10/10 Use of Restrictive Agreements Mandatory Buy-Sell Agreements Agreement Effective Only at Death Right of First Refusal Purchase Options

© 2010 Allstate Insurance Company 10/10 Business Purpose Maintenance of ownership and control within the family Providing continuity of management With testamentary devices, business purpose is not enough. Need to show it is not a device to transfer property to family member for less than adequate consideration

© 2010 Allstate Insurance Company 10/10 Actual Estate Value Value as of date of death Alternate valuation – Six months after date of death or – Sale date, whichever is earlier

© 2010 Allstate Insurance Company 10/10 Estate Valuation Proving Estate Value: – Certified Evaluation by Professional Estate Valuation Appraiser on assets where FMV not readily available – Statement from Tax Advisor/Accountant – Copies of Profit and Loss statement, assets and liabilities for past 3 years on family business

© 2010 Allstate Insurance Company 10/10 Estate Valuation Case Study Gross Estate = $10 million estimate Real Estate (farm) $1 million Real Estate (US residential & rental) $1.5 million Real Estate (Foreign)$ 500,000 Readily Marketable Securities $2 million Closely Held Business$1 million Retirement Funds$1 million Personal Property (including art)$1 million Closely Held Partnership Interests$1.5 million Trust Assets$ 500,000

© 2010 Allstate Insurance Company 10/10 Estate Valuation Case Study Real Estate (farm) $1 million Real Estate (US residential & rental) $1.5 million Real Estate (Foreign)$ 500,000 Real Estate Issues 1. Highest and best use or current use? 2. Certified appraisal of all properties? 3. Issues with foreign real estate such as long term lease versus outright fee simple ownership and ability to convey ownership rights

© 2010 Allstate Insurance Company 10/10 Estate Valuation Case Study Closely Held Business$1 million Issues with closely held business Valuation issues covered earlier Valuation discount opportunities – Fractional ownership – Minority ownership – Lack of marketability

© 2010 Allstate Insurance Company 10/10 Estate Valuation Case Study Closely Held Partnership Interests$1.5 million Valuation issues related to closely held partnerships Same issues as with closely held business What about Family Limited Partnerships Is owner a general partner or limited partner – Is there a gifting plan in place – Is there a buy sell plan in place

© 2010 Allstate Insurance Company 10/10 Estate Valuation Case Study Personal Property (including art) $1 million Trust Assets $ 500,000 Unique issues Jewelry & Art Collections Interests in trusts – Income & principal rights versus ownership – Currently distributable? – Designed to be outside of taxable estate? – Transfer during lifetime or at death?

© 2010 Allstate Insurance Company 10/10 Underwriting Takes about Days Higher Face Amounts = More Experienced Underwriter Include a Cover Letter with Details – Listing of Estate Assets Copies of certified appraisals Valuations of closely held assets and info on prior sales If family business, years in business plus tax returns Copies of any estate plan that would include projection of estate taxes and costs The more documentation, the better

© 2010 Allstate Insurance Company 10/10 Questions ????