As businesspersons, successful producers should be aware of the value of their business
just as investors should know the value of their major investment holdings. In addition,
knowing the value of a practice can be essential for a number of reasons. The principal
reasons are set forth in the following paragraphs.
Estate Planning
A valuation may be needed to achieve an equitable division of property
and to determine if adequate life insurance has been earmarked for the payment of estate
taxes. The value of compensation receivable after death is includible in the gross estate of
the descendent for federal income tax purposes. (1.) Compensation paid after death is
taxable to the recipient as income in respect of a decedent. (2.) The federal estate tax
attributable to the inclusion of compensation in the gross estate may be used by the
recipients of the compensation as a deduction from income on their income tax returns.
(3.) A recent item in Keeping Current (4.) describes a Tax Court case concerning the
issue of qualifying postmortem compensation for the marital deduction. (5.) A valuation
may also be needed in connection with the installation or updating of a buy/sell
agreement.
Death
For producers with a taxable estate, a valuation is required for the calculation of
estate taxes. Another need for a valuation after the death of the producer is when, in the
absence of a buy/sell agreement, the surviving spouse wishes to sell the decedent’s
practice. In community property states, on the death of the producer’s spouse, an estate
tax valuation is required of business issued during the marriage. (6.)
Sale
Producers who are contemplating retirement or who have become disabled may
desire to sell their practice and should, therefore, ascertain its value. One major life
insurance company has, for a number of years, offered its producers a contractual
election prior to retirement, disability, or death. The election would allow them to spread
their future compensation over a 15 or 20 year period. A court ruling held that the
original compensation was not constructively received, and only the amounts actually
receive during each year were taxable. (7.) This was a landmark case not only for life
insurance compensation but also for deferred compensation in general. A number of
other companies have similar programs.
Divorce
A valuation can assist in obtaining an equitable settlement. Frequently, the
value desired is the value of future compensation arising from sales that occurred while
the producer was married to the spouse seeking settlement.
Loans
If future compensation is used as collateral for a loan, or included in the
producer’s assets in a financial statement prepared to obtain a loan, a valuation is
necessary.
