In regards to estate planning, I am trying to learn as much of the basics as I can on the web before visiting an attorney to get things rolling.
One aspect that I am having trouble learning more about is the valuation (appraisal) that is due to occur at some point in the process.
What is the purpose of this valuation? (don't just say it is to place a dollar amount on the value of the property... say why that dollar amount is important and in what way) Why is it desireable to have your property/business valued on the low-side for estate planning tax purposes? (as opposed to encouraging a higher valuation for the purposes of a sale or financing of the property).
If you are looking at business succession plans that often involve cross-purchase buy/sell arrangements then it is wise to take a high valuation. This is because you are planning in advance and can expect the business to grow past its current valuation. And as you indicated, when you are trying to sell a business or property you want to prove it is worth as much as possible.
On the other hand, if you are planning for estate tax and inheritance purposes, the lower the valuation the better. Any property or business includable in your estate consumes some of your estate tax exemption. Any amount over the the exemption limit is subject to taxation.
If a financial planner determines that you will likely have an estate tax liability, there are various trusts and partnerships agreements that can remove property from your estate. If this becomes the situation, low valuations can also help for gifting purposes.
Like you indicated at the end of your post, there are times that a high valuation best suits you and other times when a low one serves best.
An accurate valuation is required for preparing the estate tax return. That return lists the value of everything owned by the decedent, down to automobiles and personal property like furniture. If the estate is taxable in some way (at the federal or state level) the valuation affects the amount of tax paid.
Also, when heirs sell property they inherit, their cost basis is the fair market value at the date of death (or, if elected, an alternate valuation date 6 months later). This is called the "step-up" in basis, if the heirs end up with a cost basis higher than the decedent's -- which is the typical case. An heir benefits from a higher cost basis because it reduces the taxable gain.
Simple example: you inherit $50,000 of IBM stock that the decedent paid $10,000 for. The basis is stepped up to $50,000. You sell the stock for $53,000. Your taxable gain is $3,000 (and it's long-term gain, for inherited property, regardless of how long you hold the stock).
Now imagine the same scenario, only it's stock in a small business, not shares of IBM. Someone would need to do an appraisal to value that business. If they came in at $30k for your shares and you sold it for $53k you'd have more taxable gain.
Rather than relying on the Internet I'd suggest spending 20 bucks on one of the estate planning books from Nolo Press, they're excellent:
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