Q: Should the value of marketable securities be discounted to account for market fluctuation when evaluating a guarantor’s ready cash?
A: Yes, very definitely. Fluctuating values are the one certainty we have when evaluating marketable securities. As recent events indicate all too clearly, marketable securities can fluctuate considerably and unexpectedly. When deciding the discount rate to apply, it’s important that we take a long term view to be conservative, yet realistic and fair in calculating a discounted value. We chose to use a 20% discount rate in restating the value of Mr. Schumacher’s marketable securities.
Q: Are retirement accounts considered liquid?
A: Although most retirement accounts can generally be liquidated quite easily, the feasibility of doing so often makes them an account of “last resort”.
That feasibility depends on two things:
- The asset composition of the retirement accounts.
- The cost of early liquidation.
The underlying investment may be a vehicle subject to market fluctuation and may charge transactional or administrative fees for any withdrawal since the investment is intended to be long term. In addition, the IRS expects that taxes will be paid on the full amount of the withdrawal (unless the account is categorized as a Roth) plus a 10% IRS tax penalty on withdrawals made before age 59 1/2. The combined impact of the costs associated with liquidating a retirement account persuaded us to exclude them as one of Mr. Schumacher’s liquid assets. But, do be guided by your institution’s policy and practices in this area.
Q: Although Mr. Schumacher is 100% direct or indirect owner of the two S Corporation operating companies, he is a 50% owning member or partner of the real estate companies. Why did he receive 100% of all the companies' distributions and owner-related loans? What would happen if he was only a 25% owner?
A: The short answer is that businesses can do whatever the owners or partners agree to do. Mr. Schumacher did indeed receive all distributions and his real estate companies’ partner, Mr. Castillo, received none. Mr. Schumacher is, in effect, the partner or owner in charge of all four companies. Even with 50% partnership stake he is running the companies and obviously has the ready concurrence of Mr. Castillo in making these type of decisions. We expect that, even if he were only a 25% owner, these actions would not change. Mr. Schumacher is the whole show.