Despite the recent partial rebound of the stock market, the economic realities developed in the second quarter of 2020 is having a devastating effect on the economy. Unemployment is at an alarming rate, several prominent businesses have declared bankruptcy, and many businesses, small and large, are debating their future. That being said, this new reality may provide estate planning opportunities to reduce gift and estate taxes. In this blog, I’d like to discuss the valuation of promissory notes and how their valuation may be affected during times of economic hardship. Promissory notes are commonly used to transfer assets between family members. Sometimes these notes are part of a gifting program; other times, it may be an asset of an estate. In either instance, the note needs to be valued. Standard of Value The standard of value in gift and estate matters is fair market value. Fair market value is defined in Revenue Ruling 59-60 [2.2 Section 20.20231-1(b) of the Estate Tax Regulations (Section 81.10 of the Estate Tax Regulations 105) and Section 25.2512-1 of the Gift Tax Regulations (Section 86.19 of Gift Tax Regulations 108)] as “the price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy, and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts.” The fair market value standard assumes that the price is transacted in cash or cash equivalents. Court decisions […]
Monthly Archives: June 2020
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Valuing Promissory Notes In Difficult Economic Times
Posted in Business Valuation, on Jun 2020, By: Mark S. GottliebShare