Chapter 2

Bean Counting: Figuring Out What You’re Worth

IN THIS CHAPTER

check Determining the value of your real and personal property

check Including your debts in your estate’s value

check Reducing and controlling your estate’s value through gift giving

check Figuring out adjustments in your estate’s value after your life changes

Quick: How much are you worth?

You may think you have a pretty good idea of what your estate is worth — within 5 to 10 percent, give or take — but you may be very surprised when you actually sit down and start taking stock of your assets.

If you’ve ever filled out a loan application for a new car or a home mortgage, chances are that when you began listing your assets, you thought of several items beyond your savings accounts and mutual funds that turned out to be quite valuable. What about that wardrobe of $2,000 custom suits? And how about all those antiques from trips to Europe? Even families with more modest tastes usually have the family silverware, jewelry, household furniture, and several other items that add up to a decent amount of money.

Therefore, to be accurate in your estate planning, you need to know how much all your estate is really worth. And if you’re like most people, you need to dig beneath the surface and beyond the obvious — factoring in your debts and the future, too. This chapter tells you how.

Calculating the Value of Your Real Property

Your real property (your home and other real estate–related investments) may very well be the most valuable part of your estate. You need to carefully determine the value of all real property, especially if your estate plans call for dividing the value of that real property among more than one beneficiary. You want to be fair, and you want to have a good idea of what each beneficiary will receive, particularly if some beneficiaries will get other (non-real property) parts of your estate and you’re trying to divide your overall estate as equally as possible.

Your home on the range

If you recently purchased your home (say within the last year or two), you have a pretty good idea of your home’s worth, even if you live in an area where real estate prices are rapidly going up.

However, if you purchased your home a long time ago, you may have no idea of your property’s value. For example, maybe you never purchased your home at all — perhaps you’re living in the family’s ancestral home that’s been in your family since the early 1900s.

Either way, you need to get an official idea of your home’s value, and you can do so in one of two ways:

  • You can hire a real estate appraiser who does nothing but determine property value. A paid appraiser is likely to give you the most thorough and accurate idea of your home’s value because you pay for that service.
  • If you don’t want to pay an appraiser, you can do what real estate professionals call “checking comparables.” You can find the sale price of a comparable property in or near your neighborhood with the same floor plan, the same exterior design, roughly the same lot size, and other characteristics nearly identical to your home.

warning In most suburban settings, prices and values for nearly identical properties can vary widely depending on what neighborhood the house is in, even if those neighborhoods are right next to each other. So make sure that if you decide to determine your home’s value based on comparable properties yourself, you understand the differences in property values between popular, highly coveted neighborhoods and others not quite so prestigious.

If you live in a home that’s unique in any way — a farmhouse set on hundreds of acres or a two-centuries-old brownstone in a downtown neighborhood, for example — then you should definitely hire an appraiser. Otherwise, you can be way off in determining what your home is worth.

That time-share in Timbuktu and other hideaways

If you own a second home of any kind, from a beachfront bungalow to a condominium at the foot of a prestigious ski resort (or even a part of a second home, such as a time-share), you can figure out what that property is worth in much the same way as you do your primary home.

Your investments as a landlord

If you have any investment real property, such as a rental duplex or a share of an apartment building or office complex, then you probably have some background in how to value residential or commercial real estate. (At least you should, because you had to decide whether the investment you were considering making was a good deal or not.)

tip If you do your own finances for your real estate investments, you’re familiar with terms like net operating income and capitalization rate, which are used to calculate how much your investment is worth. But if you don’t do your own finances for your real estate investments, don’t worry. Whoever manages your investment for you does know these terms, so just ask your investment manager how much your investment is worth. If, however, you invested $50,000 ten years ago in rental property because your brother-in-law told you it was a good idea and you have no idea about operating expenses and cap rates, then take the easy way out: Contact a commercial real estate appraiser and get your investment property appraised.

tip If you hire an appraiser for commercial investment property, make sure the appraiser is experienced in valuing the type of property you have. (Don’t hire a residential home appraiser to tell you what your 20 percent of a commercial farming operation is worth.)

Your real estate partnerships

You may have an investment in real property that isn’t a direct investment but rather is an investment in a Limited Liability Company (LLC) or Limited Liability Partnership (LLP). (LLCs and LLPs are just methods of ownership that have gained favor over the past years primarily because of their tax advantages.)

technicalstuff The value of some LLCs and LLPs can vary greatly from year to year. Additionally, you usually have restrictions on how you can sell or otherwise transfer control of your ownership portion of an LLC or LLP. Those restrictions often result in a valuation discount, meaning that your portion of an LLC or LLP is actually worth less than you would calculate using your share of the income minus your share of the expenses. Consequently, you need to keep current — usually through regular statements you receive from the LLC or LLP — and adjust the value of your estate accordingly.

For example, if you have an investment in a shopping center through an LLP, the shopping center’s value can be dramatically affected if an anchor (main) tenant files for bankruptcy and shuts down the location at your shopping center. The property’s revenue decreases, which in turn decreases the net operating income, ultimately decreasing the shopping center’s value when you divide the net operating income by the cap rate.

You typically use LLCs and LLPs to own shares of more valuable investment real properties (such as large office complexes or an apartment complex with hundreds of apartments) rather than shares of properties you invest in directly (such as smaller office buildings or a duplex residential site). Therefore, the value of LLCs and LLPs is likely to fluctuate more than any direct real estate investments you have. Monitor them closely, not only for estate-planning purposes but also for personal investment purposes.

Calculating the Value of Everything Else: Your Personal Property

Get out the notepad or the spreadsheet program, and get ready for some long lists of your tangible and intangible personal property. You need to be as thorough as possible so that you can accurately figure out what your estate is worth.

Tangible personal property — items you can touch

You will likely see an interesting paradox with regards to your tangible personal property (cars, jewelry, and other household items). You probably have far more individual items of tangible personal property that you need to catalog and value than the other types of property in your estate (real property and intangible personal property). However, for most people, tangible personal property has the smallest overall value.

Some of your personal property may be almost (or even totally) worthless in a financial sense, but you still need to catalog those items and decide what you want to happen to them after you die. For example, who do you want to get the lucky Liberty nickel that your grandfather carried over on the boat when he came to the United States in 1898, the one that was handed down to your father and then to you? Maybe the nickel isn’t worth much more than a nickel even though it’s more than 100 years old, but it still carries great family sentimental value. So which of your four children will you leave that nickel to, and what other sentimental goodies will you leave to the others?

You could, of course, let your children, grandchildren, and other family members “put in a claim” on some or all your “trinkets” while you’re still alive — sort of a grab-bag approach to giving away part of your estate. But even if you decide to take that approach, you need to have everyone’s “wish lists” and make sure that your will reflects all those who-gets-what decisions.

But even leaving aside small-value personal property, the rest of your tangible personal property can add up. Just take a look around your living room at the furniture and antiques, or in your den at that autographed 1927 New York Yankees’ baseball and your collection of first-edition Hemingway novels.

So get cracking. You need to figure out what your property is worth, after you first figure out what you have. Overwhelmed at the thought? Here are a few tips to help:

  • tip Combine your estate planning-related valuation of your tangible personal property with the same activities for insurance purposes. Most homeowner or renter’s insurance policies require you to provide a list of your jewelry, collectibles, and antiques to be included beyond your basic coverage (often more than a certain dollar amount, or for certain types of items). If you need to spend the time cataloging those items and determining what they’re worth for your insurance company, use those efforts for your estate planning as well!

  • Cataloging hundreds of items can be tedious, and even if you aren’t prone to procrastinating, you can often find some way to stretch out the process as long as possible. But if you have a video camera, you can take a guided tour through your home (as well as your second home, if you have one) and narrate the tour into the camera’s microphone: “Here is that first-edition Batman that my idiot husband insisted be framed and hung over the sofa in the living room instead of the painting that I wanted to put there; it’s worth …”
  • Appraisal fees can really add up, especially for hundreds of items. You can get a pretty good idea of what your tangible personal property is worth by using eBay or another online auction service for research. Look for the identical item (or one close enough and in more or less the same condition) that you have and check the final winning bid of recently closed (completed) auctions, or current bids of active auctions about to close.

Intangible personal property — bank accounts, stocks and bonds

Your intangible personal property — your paper financial assets, such as your bank accounts, stocks, mutual funds, annuities, and so on — may make up a substantial portion of your estate, particularly if you’ve invested your money wisely and diversified your assets.

Fortunately, figuring out what most types of your intangible personal property are worth is fairly straightforward. (More about what’s not so straightforward in a moment.) You can

  • Check your bank statements for the value of your checking accounts, savings accounts, certificates of deposit (CDs), Individual Retirement Accounts (IRAs), and so on.
  • Consult an interest payment schedule to get the current value of savings bonds.
  • Look up the current prices of your stocks in the newspaper or check any of the many online financial websites that give you stock prices, and multiply that price by the number of shares you own.
  • Read the paper each morning and find the net asset value (NAV, a mutual fund term meaning the actual value of each share) of the mutual funds you own, and multiply the NAV by the number of shares you own.
  • Ask your broker for the value of your government or corporate bonds, or more complicated investments like call-and-put options and commodities futures.

tip If you use a computer program to track your portfolio’s value, you probably already have the information described at your fingertips; just consult the program you use to figure out the value of those investments.

You may have some intangible personal property that is a bit more complicated when it comes to figuring out its value. For example, you may have stock options from your employer. (Stock options give you the right to purchase shares of your company’s stock at some point in the future at a guaranteed price per share, no matter how much higher — you hope, anyway — your company’s stock price goes.)

If you’re one of the “Head Honchos” at work and have a sizable stock option package, consult with an experienced investment professional to help figure out what your options are worth.

technicalstuff Valuing your stock options may be complicated, particularly if your company hasn’t gone public yet. If your company hasn’t gone public, you can’t look up your company’s stock price in the newspaper or online because your company isn’t yet publicly traded. And even if your company has gone public, the real value of your stock options isn’t quite as simple as if you actually owned those shares of your company’s stock covered by those options, where you simply multiply the number of shares by the price per share. To calculate the precise value of stock options, investment professionals use complicated factors and terms, such as intrinsic value and the Black-Scholes Model. Sound confusing? If you want to find out more about valuing stock options, you can check out Trading Options For Dummies, 3rd Edition, by Joe Duarte (Wiley, 2017).

Dead Reckoning: Subtracting Your Debts from Your Assets

Book 5, Chapter 1 mentions that in addition to your positive balance assets — real property, tangible personal property, and intangible personal property — your estate’s value must also include negative balance (amounts that you owe).

After you figure out the value of your assets, you simply add up all the debts you owe and subtract that total from your assets to give you the net worth of your estate. These debts include the outstanding balances on

technicalstuff If you have any kind of credit-related life insurance — mortgage insurance, credit card insurance, and so forth — that will pay off the balance of a particular debt, then that life insurance effectively cancels out the debt for purposes of calculating your estate. So don’t forget to consider any credit-related life insurance when you’re adding up all your property and debts. However, credit-related life insurance isn’t a particularly good idea if you can get life insurance elsewhere. Book 3, Chapter 2 talks more about life insurance.

Giving Gifts throughout Your Life to Reduce Your Estate’s Value

You’ve probably seen the expression that was popular on bumper stickers and posters in the mid-1990s: “He who dies with the most toys wins.”

Well, not when it comes to estate planning and, specifically, death taxes. The more your estate is worth when you die, the bigger the tax bite. So part of your estate-planning strategy may be to give away some of those toys while you’re still alive, effectively transferring those assets from your estate to someone else’s estate.

warning You need to remain aware of many complications with gift giving, such as annual limits on the value of gifts, lifetime asset transfer limits, strategies where you and your spouse coordinate your respective gift giving, and tax implications.

For now, though, realize that as you tally up all the property in your estate and the property’s value, you need to work with your estate-planning team to figure out whether gift giving makes sense for you and, if so, how to get started on a sensible, tax-managed gift plan.

tip You also need to consider gift giving even if financial and tax reasons don’t come into play. For example, you may want to give certain items of sentimental value to a family member or friend, or perhaps a charity or foundation instead of waiting until your estate is settled (and you’re no longer alive). Even in these sentimentally based situations, consult with your accountant to determine any tax implications.

Calculating Adjustments in Your Estate’s Value Due to Life Changes

Like pretty much everything else related to estate planning, you need to be very vigilant about keeping up-to-date with the change in your estate’s value over time.

Changes in your life can dramatically alter your estate’s value and, in turn, cause you to rethink your overall estate planning and how you want your estate divided after you die.

For example, if you get divorced, your estate’s value will likely change dramatically as a result of the divorce settlement. Or, on a more uplifting note, if you win the lottery or have the value of your stock portfolio go way up, your estate’s value also increases and you may want to rethink your estate plan.

warning If you ignore dramatic changes in your estate’s value, you run the risk of having an out-of-date estate plan that doesn’t come close to reflecting what your original intentions had been.

For example, suppose you have two children, and in your estate you have $200,000 in various certificates of deposit and treasury bills, plus $200,000 worth of stock in an Internet company called NeverShouldHaveGonePublic.com that you purchased in early 1999. When you finally got around to preparing your will later that year, fearing that the Y2K computer bugs would cause widespread chaos and who knows what else, you decided to leave the $200,000 in CDs and T-bills to your daughter and the NeverShouldHaveGonePublic.com stock to your son.

By early 2002, NeverShouldHaveGonePublic.com had joined the dot.com graveyard and the stock was totally worthless. If you die before you update your will, your daughter will get the current value of the CDs and T-bills (now a little bit more than $200,000 because of interest earned since 1999), but your son will get a whole bunch of worthless stock. Therefore, if your intention had been to divide your estate equally between your two children, you first need to realize that your estate’s value has changed, and then you need to update your will to reflect those changes and a new strategy of who gets what.

(As discussed in Book 2, Chapters 2 and 3, if your intention had been to leave each of your children equal shares of your estate, you could have — and should have — divided those assets equally between your daughter and your son. If you had done so, you would not have to update your will simply because of the dramatic change in your estate’s value.)