12.4 Intangible Personal Property

• Library: A Lawyer's Guide to Estate Planning: Fundamentals for the Legal Practitioner (ABA) (2018 Ed.)

12.4 Intangible Personal Property

The principal types of intangible personal property consist of stocks, bonds, and similar securities.⁸ For valuation purposes, securities can be classified as actively traded securities and inactive or closely held securities. The value of securities listed on a stock exchange is easily obtainable by referring to the trading prices on the date of death, then valuing the security at the average of the highest and lowest quoted selling prices on such date.⁹ If the decedent dies on a day when the security was not traded, the value of the stock is determined by taking the average of the highest and lowest selling prices on the nearest dates before and after the date of death. These mean prices for the two days closest to the valuation date are then averaged, but the average must be weighted inversely by the number of days between the two selling dates and the date of death. For example, assume that the sales of stock nearest the date of death occurred two trading days before and three trading days after such date, and on these days the mean sales prices were $10 and $15, respectively. The price of $12 represents the fair market value on the date of death, computed as follows:¹⁰

(3 x $10) + (2 x $15) / 5 = $12

Dividends sometime create a problem in valuation. For example, dividends on common stock are included in the gross estate if the decedent was the owner of record of the stock on the date of his or her death, even though the dividend was not payable until after death.¹¹ Similarly, if the dividend was declared before the decedent's death and was payable to stockholders of record after the decedent's death, the stock is selling "ex-dividend" at the decedent's death. In this situation the amount of the dividend is added to the ex-dividend stock quotation to determine the value of the stock at the date of death.¹²

Bonds are valued much the same as stock when the bonds are actively traded. Many highly marketable bonds, such as municipal bonds, do not have generally accepted published trading values. Valuation for a particular bond issue is usually easily obtainable from a brokerage house or bank that is familiar with the bond market.¹³ The value should include the accrued interest on the bond to the date of the decedent's death.

12.41 Valuation of Closely Held Stock

Valuation of closely held or inactively traded securities is more difficult. Because of the lack of an established market for this type of stock, different criteria must be used. Although there are numerous factors that have a bearing on valuation, the following offer a good general guideline: (a) the nature of the business and its history; (b) the economic outlook in general, and the condition and outlook of the industry in particular; (c) the book value of the stock; (d) the company's earning capacity; (e) the company's dividend-paying capacity; (f) goodwill and other intangible values; (g) the relative size of the block of stock to be valued; and (h) sales of similar stocks.¹⁴

Although these criteria are helpful, they provide only guidelines and do little to arrive at a valuation for a particular closely held stock. There are several different approaches to valuation, but two of these approaches are most frequently used and will be the most helpful. They are (1) the book-value approach and (2) the capitalization-of-income approach. When using these approaches to arrive at valuation, certain information must be furnished to the IRS, including complete financial and other data used to determine value, recent balance sheets, and income statements for the five years immediately before the valuation date.

Planning Pointer 1

A frequent estate planning technique is the estate freeze, whereby the owner tries to freeze the present value of the business and shift future growth to the successors, typically the owner's children. This technique involves the owner's receiving voting preferred stock with a fixed liquidation value and creating common stock that is nonvoting. Future growth in the business will benefit the common stockholders, with the owner's value frozen at the liquidation value of the preferred stock. This technique has been codified in Internal Revenue Code Sections 2701-2704. The tax code has sought to limit overzealous use of this planning technique and in the process has greatly complicated its...