Determining the value of a financial asset can be an optional decision, but in most cases it is a requirement. An example of an optional category is an investor who wants to study the current market value of an asset acquired many years ago. The main driver of mandatory or mandatory assessments is the Internal Revenue Service (IRA). All tax related matters must be assessed against IRS rules and regulations. Let’s examine when and why promissory notes are valued and valued.
IRS Income Decree 59-60 details assessment requirements for income tax, property tax, gift tax, or other Federal tax purposes. Assessment notes and an appraisal expert are required in the following situations:
Valuing records, both business and personal, for auditing or taxation reasons
Notes are part of the financing for the sale of a business
When a wealth manager advises on tax-related estate planning
When estate attorneys and trusts and CPA value records for distributions and taxation
Gift Tax Planning- “gift giving”
Charitable Contribution Planning
Valuation of assets of related parties (family members).
Divorce property asset valuation
Valuation of assets dissolving the partnership
Self-assessment of IRA accounts
Valuation experts are increasingly involved in working with real estate and trust attorneys, auditors, CPAs, and investors. These parties require valuation and valuation of financial assets.
Factors Affecting Note Valuation
The following list outlines the thirteen assessment factors:
1. Clarity in the language of the loan document
2. Terms and conditions of loan documents
3. Fixed or adjustable interest rates
4. Long or short term loan duration
5. Schedule of payments-amortization or interest only
6. Loan payment history
7. Financial information and financial strength of the borrower
8. Guarantee guarantee
9. Economic conditions
10. Asset marketability
11. Asset liquidity
12. Debt collectibility
13. Risk factors
All of the above factors are analyzed and evaluated individually; then, they should be analyzed alongside one another. Each of my thirteen factors influences one or more of the others. Their relationship affects the final Fair Market Value. Experienced judgment and training are required to reach rational and defensible judgment conclusions.
Other Cash Flow Financial Instruments Requiring Valuation
Promissory notes aren’t the only type of cash flow financial asset that requires valuation and valuation. More than fifty categories of non-publicly traded financial assets require assessment by independent third party appraisers. Below are some of the more common categories.
Contract for Deed – Land Installment Contract
Promissory notes are secured by business assets
Financing is Brought by the Seller/Seller-Financed Promissory Note
Part ownership of a revenue stream
Full ownership of the revenue stream
Full ownership of the balloon balance
Other Cash Flow Financial Instruments-Not Promissory Note Related
accounts receivable
General consumer debt
Automatic financial records
Rent payments
Commercial and consumer ratings
Credit Card Debt
Health and Country Club Membership
Equipment rental
Trust forward
Retail Installment Contract
Lottery win
Cruise ship promissory notes
Annuity payments
Insurance settlement
Timeshare and vacation club contracts
Legacy and progress of faith
Lottery win
Military retirement pension
Casino prizes and awards/wins
Structured Completion/Class Action Awards
Tax lien certificate
What Professional Appraisal Services Should You Expect?
Privately held promissory notes are often the core of the owner’s retirement savings; it often represents a large portion of the estate’s value. Because of this, the valuation expert must have real experience in valuing and appraising personal promissory notes. The appraisal report must have good reasons, and be supported by documented conclusions. It must be an objective and defensible valuation analysis that will survive litigation or come under the scrutiny of the IRS.