An Ordinary Annuity Consists Of Stream Of Cash Flows When and Why Is a Promissory Note Appraisal Required?

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When and Why Is a Promissory Note Appraisal Required?

Determining the value of financial assets can be an optional decision, but in most cases, it is a requirement. An example of an alternative category is an investor seeking to know the current market value of a property acquired several years ago. The main driver of required or mandatory assessments is the Internal Revenue Service (IRA). All tax related items must be valued in accordance with IRS rules and regulations. Let’s examine when and why promissory notes are valued.

IRS Revenue Ruling 59-60 details appraisal requirements for income tax, estate tax, gift tax, or other federal tax purposes. Take note of appraisal and valuation experts in the following situations:

Determining the value of notes, both commercial and personal, for audit or taxation purposes

A note is part of the financing for the sale of a business

When a wealth manager advises on tax-related estate planning

When estate and trust attorneys and CPAs value notes for distribution and taxation

Gift Tax Planning – “Gifts”

Charitable Contribution Planning

Related Party (Family Member) Property Valuation

Valuation of Divorce Assets

Partnership Dissolution Asset Valuation

Self-Directed IRA Account Evaluation

Appraisal specialists are increasingly involved in working with 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 of loan document language

2. Loan Document Terms and Conditions

3. Interest rate-fixed or adjustable

4. Tenure of loan-long or short term

5. Payment schedule-amortizing or interest only

6. Loan payment history

7. Financial information and financial strength of the borrower

8. Collateral Security

9. Financial Conditions

10. Marketability of Property

11. Liquidity of assets

12. Collectibility of Debt

13. Risk Factors

All the above factors are analyzed and evaluated individually; Then, they should be analyzed in conjunction with each other. Each of the thirteen elements influences me in one or more ways. Their correlation affects the final fair market value. Arriving at rational, defensible assessment conclusions requires experienced judgment and training.

Other cash flow financial instruments that require valuation

Promissory notes are not the only type of cash-flow financial asset that requires valuation and appraisal. More than fifty categories of non-publicly traded financial assets require a valuation by an independent, third-party appraiser. Listed below are some of the more common categories.

Contract for contract–installment land contract

Promissory notes secured by commercial property

Seller Carried-Back Financing/Seller-Financing Promissory Note

Partial ownership of income streams

Full ownership of the income stream

Full ownership of Balloon Balance

Other cash flows are not related to financial instruments-promissory note

Accounts Receivable

General consumer loans

Auto Finance Notes

Lease payments

Decision-Professional and Consumer

Credit card debt

Health and Country Club Memberships

Equipment rental

Faith grows

Retail installment agreement

Winning the lottery

Yacht Promissory Notes

Annuity payments

Insurance Settlements

Timeshare and vacation club agreements

Heritage and faith progress

Winning the lottery

Military Retirement Pension

Winning prizes and awards/casino

Structured Settlements/Class Action Awards

Tax lien certificates

What Professional Assessment Services Should You Expect?

A privately held promissory note is often the centerpiece of an owner’s retirement savings; It often represents a large portion of the estate’s value. As such, a valuation expert must have actual experience in valuing and valuing private promissory notes. The evaluation report should be well reasoned and supported by documented findings. It should be an objective and defensible valuation analysis that will survive litigation or IRS scrutiny.

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