Valuing Notes Receivable Included in an Estate

May 2006
Journal of Financial Service Professionals;May2006, Vol. 60 Issue 3, p50
Academic Journal
Abstract: For estate and gift tax planning purposes, appraisers commonly use valuation discounts when providing an opinion of value for a partial interest owned in a closely held business or real property. These discounts, which are meant to quantify the lack of control and lack of marketability of the subject interest, essentially reflect reductions in price that unrelated parties would negotiate as part of a purchase and sale of the interest. Ultimately, these discounts provide a reduction in the value of the taxable estate. Another planning opportunity is the use of discounts to value promissory notes receivable owned by a decedent's estate. When preparing the estate tax return, rather than simply valuing the note at its unpaid principal balance plus accrued interest, appraisers may apply discounts because of changed circumstances between the date the note was initially issued and the date of death. A wide variety of factors are considered, including the marketability of the note at the date of death. This article examines the subjective analysis used to quantify an appropriate discount for a note receivable that may be acceptable to the IRS.


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