Evaluating “You” in Your Estate Plan?

Executors of estates for people who owned small businesses, particularly in service areas like law, accounting or medicine, where the revenue is reliant upon the owner, often face the opposite problem of the Salinger and Jackson estates: the values plummet when their owners are gone, but the I.R.S. still assesses a tax on the value at the date of death.

Some assets are easily valued, while others are unique and hard to value. But how do you value assets unique to “you” and even assets that, for all intents and purposes, are you?

From a human interest perspective, if nothing else, you will want to read about the estates of Michael Jackson and J.D. Salinger as reported in a recent article in The New York Times titled “Putting an Estate Value on the Assets Unique to You.”

It seems there is a commonality between Michael Jackson, the late king of pop, and J.D. Salinger, the late author of The Catcher in the Rye. Beyond their fame and [relatively] recent passing, the value of both estates has been a moving target with the IRS solely as a result of their passing.

In the case of Jackson, his estate was rather valuable at the time of his death. Nevertheless, the estate value has continued to skyrocket with ongoing IRS scrutiny. The initial valuation of the Jackson estate came to a mere $200 million. However, with the benefit of several intervening years of high sales driven largely by an improving image of the late Jackson (an image not driven by scandal, you might say) the IRS has come to value the estate at $700 million. The estate was not worth as much when he passed and only shot up in value because of his passing (and an economic upswing). So, which value is fair?

If the estate value does not come until well after, or well before the time of death, at which time should it be valued and how do you plan for that?

The Jackson estate value is newsworthy because of who he was, but the situation is not all that uncommon.

Intangible assets often face radical valuation spikes. Think intellectual property and patents, as common examples.

On the other side of the coin, there can be plummeting estate values, such as when a business owner dies. The sole-proprietorship may be valuable when the owner is alive, since the business is them. However, that is hardly a reasonable basis for valuation and taxation once they’re gone.

Indeed, the valuation of many estates can be more of an art than a science.

Reference: The New York Times (September 27, 2013) “Putting an Estate Value on the Assets Unique to You”