Valuing Hard To Value Assets
A sound estate plan must include all assets, including liquid and non-liquid. While some are relatively simple to value, such as bank accounts, others, such as unique assets, present more challenges. Valuation of hard-to-value or unique assets is often a challenging and time-consuming part of estate planning. Various methods may be appropriate, depending on the type of asset and circumstances. A knowledgeable and experienced estate planning lawyer at Roulet Law Firm, P.A. could answer questions and help residents of Minnesota and Florida with the determination of hard to value assets.
What Are Hard To Value Assets?
Hard-to-value assets are property and investments or other owned assets without active market price value or identical assets against which they may be compared to determine their worth. A thorough estate plan must include a complete list of assets that provides for the valuation of unique assets. Assessors and appraisers use book values, valuation models, cash flow, and comparables to determine the current cost estimation of unique assets. The methods they use consist of objective and subjective value measurements and play a massive role in estate planning and management. According to the Office of the Comptroller of the Currency, hard-to-value assets include the following:
- Real property, such as investment properties and second homes or land
- Sole proprietorship or limited liability companies owned by one person or a small group of people
- Mineral interests, such as gas, oil, and other solid minerals
- Loans and notes, like mortgages, unsecured loans, and property-secured real estate notes
- Life insurance policies
- Collectibles such as art, stamps, coins, wine collections and antiques
- Classic cars and car parts
- Tangible assets such as jewelry and household furnishings
A qualified lawyer at Roulet Law Firm, P.A. could help individuals and companies in Florida and Minnesota with the hard to value assets process. They could also go through the complete list of unique assets and the process of how to obtain accurate appraisals.
Why Is It Difficult To Determine the Value of Hard-To-Value Assets?
Estimation or appraisal of some forms of property and liquid assets, such as bank accounts, real estate, and cars, is usually straightforward. However, the methods needed for the valuation process for hard-to-value assets are complex and often require the help of a professional appraiser or assessor. Unique asset valuation, such as collectibles, alternative investments, and ownership of limited partnerships, is challenging because it requires the use of specific methods and estimations.
How Do You Value Your Unique Assets?
Similar to asset valuation for liquid assets, the goal for the valuation of unique assets is to determine the current fair market value. The process of obtaining current and reliable assessments requires substantial knowledge of specific formulas and the use of hard-to-value valuation methods. Assessors and appraisers use a range of valuation models, comparables, cash flow analysis, and book values to make reliable estimates of the current monetary value of the property. According to the Minnesota Department of Revenue, the market value of real estate for tax purposes is called the open market value. The system is based on the total value and price that a property would sell for under normal circumstances.
Unique Asset Valuation Presents Complex Challenges and Benefits
Unique assets have many benefits, including less potential for asset depreciation, even during inflation. However, determining the value of the assets is often complicated and may require the help of a knowledgeable assessor or appraiser. The three main factors the valuation model uses to measure the value of unique assets objectively include assets, income, and the market. Three of the most significant methods of hard-to-value asset valuation are as follows:
Income Valuation Approach
The income valuation method is most effective for valuing real estate and is used by most professional appraisers and land value assessors. The appraiser divides the rental income before interest and taxes by the capitalization rate to estimate the fair value.
Cost Valuation Approach
For the cost valuation approach, a real estate assessor calculates the monetary value by the estimated land value plus the property owner's recent improvements, then subtracts the property depreciation. The cost valuation approach is the most dependable unique assets property valuation method.
Market Valuation Approach
The market valuation method assesses the monetary value of intangible assets, business ownership, or security. The appraiser's estimation involves consideration of the current market price and comparables. Comparables include similar businesses currently or selling on the market recently.
Integrating Hard-To-Value Assets Into an Estate Plan
A thorough estate plan must include a complete list of the individual's assets, and that includes those that are more challenging to value. According to the American Bar Association, estate planners must obtain current and reliable appraisals and valuations of unique assets to prevent penalties, audits, and unexpected tax bills. Hard-to-value asset valuations must be accurate and complete and meet federal law requirements.
The Internal Revenue Service (IRS) requires qualified appraisers and assessment professionals to complete the appraisals and assessments to ensure they meet the regulation guidelines. While determining the value of liquid assets is simple, valuing unique assets requires strong knowledge of the available methods and how to use them to estimate the current value accurately.
Schedule a Consultation With a Seasoned Estate Planning Attorney Today
Unique assets are investments and property with no current and active market price for comparison. Valuing unique assets is one of the most complex and challenging parts of estate planning, and many estates include at least some non-liquid assets. There are more hurdles to overcome with estate planners having various types of non-liquid and hard-to-value assets. Estate planning mistakes involving asset valuation could lead to many problems later down the road for the estate planner and their beneficiaries. They could incur penalties, large and unexpected tax bills, and time-consuming IRS tax audits. Therefore, taking the time to ensure the valuations are updated and accurate more than pays off in the long run. Residents of Florida or Minnesota can schedule a consultation with a qualified and knowledgeable estate planning attorney at Roulet Law Firm, P.A. by calling our Florida office at 941-909-4644 or our Minnetonka, Minnesota office at 763-420-5087 for more information about hard to value assets.
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