A Federal Estate Tax is imposed on the transfer of the taxable estate of every citizen or resident of the United States. Estates whose gross assets exceed a minimum level must file a listing of these assets, and their values, with the IRS.
An estate appraisal is the result; it lists the tangible assets of an estate, including art, antiques, real estate, automobiles, boats, and household furnishings. These appraisals must be effected according to a strict set of IRS standards and rules, and filed as part of the estate tax documents. Estates are appraised at Fair Market Value (see sidebar).
The basis of a correct FMV estate appraisal is a first-hand inspection of the property and its evaluation based on “fair market” standards, memorialized in a properly-executed document, by an appraiser judged by the IRS to be qualified.
Mistakes in Estate Filings Can Be Costly
An IRS panel in Washington reviews each year’s estate and gift tax filings of certain art, antiques, coins, and related categories. In the 2007 review process, the IRS accepted just 39% of the appraisals as filed. The rest of the applications were adjusted, or rejected. Penalties for incorrectly filed appraisals can run as high as 40%.
Six of the most common grounds for IRS rejection of estate appraisals are: the absence of required documentation, incorrect or insufficient cataloguing content, incomplete price level comparisons, price levels determined through incorrect methodology, improper format, or the execution of the appraisal by an appraiser who has been “disqualified” by the IRS, a penalty paid by some irresponsible appraisers who have accumulated a history of erroneous submissions.
Estate appraisals often require knowledge and experience in a broad range of categories. Read & Mullin works with a nationwide network of specialists whose contributions to these challenging projects affords our clients the best expertise available.
Fair Market Value
(FMV) This value represents a price that would be agreed between a willing buyer and a willing seller, with neither being required to act, and both having reasonable knowledge of the relevant facts.
Nine-Month IRS Deadline
An estate must file with the IRS within 9 months of the date of the passing of the decedent.
Determining Fair Market Value
This would be a simple matter if you could rely on fixed formulas, rules, or methods. Usually it is not that simple. There is no single formula that always applies when determining the fair market value of property.
Statement of Value
The IRS will issue a pre-emptive finding of value on properties that exceed $50,000 for a set fee, currently $2,500. Applications must be made prior to the filing of the tax return.
Appraisal Fees are Deductible
They must be entered correctly, however; appraisal fees qualify as a miscellaneous deduction, not as part of the charitable deduction itself.
A properly-calculated insurance value must protect the owner from loss. This value represents the full retail price that the insured would have to pay to replace a piece, in the same manner, and under the same circumstances, as the original purchase.
Value levels in insurance appraisals are often significantly higher than the “fair market” valuations that are the basis for Estate, Gift, and Charitable Giving appraisals.
It has been common practice to appraise and schedule on a homeowner’s policy any piece, or pieces, with a value of $5000 or higher. The claim problems encountered by both insurers and homeowners in recent years have caused a re-examination of this practice, however. Now, pieces of rarity, finesse, historical importance, significant provenance, or quality are also routinely added to insurance schedules, to insure prompt settlement in case of loss.
The buying habits of the purchaser, and the availability, or lack of availability, of the subject property are important elements in determining insurance values. In many instances, this requires that the appraiser has the knowledge and experience of both local and international markets to know where the subject piece may be re-purchased, from whom, and what its cost would be.
As a general rule, it is sensible to review an insurance appraisal every three years. Values in the various art and antique markets change at varying rates, sometimes dramatically, depending on ever-changing market factors. Collectors who subscribe to our Quarterly Update Service will learn about significant changes in certain price levels that are relevant to works in their collections.
Insurance appraisals protect our clients from loss. In an ever-changing market for art and antiques, we advise our clients to update the values on their appraisals every 4-5 years.
Replacement Cost Insurance Value
Insurance values are meant to protect the insured from loss by guaranteeing the replacement of a piece at full retail cost, in a reasonable amount of time.
If in Doubt - Document
The one sure way to pre-empt delay, or rejection, in the payment of a claim is to have properly documented and scheduled the piece on the policy.
Many pieces simply don’t turn up in US markets, and “replacement value” must be determined at an international point of purchase. Be sure your appraiser and insurer understand and accept the responsibilities implied by this circumstance.
The Three-to-Five Year Rule
This is the generally-accepted amount of time it takes an appraisal to fall out of “current” status. Careful, though; some art and antiques markets experience far more rapid change than this guideline.
Gifts are broadly-defined by the IRS. Those that apply here are as follows: You make a gift if you give property, or the use of income from property, without expecting to receive something of at least equal value in return. You also make a gift if you sell something at less than its full value. The gift tax applies in both of these cases.
Generally, gifts of more than the annual exclusion (now $14,000) for the year are the primary subject of gift tax filings made to the IRS. These returns require the completion of IRS Form 709, along with a properly-executed report by an appraiser the IRS judges to be qualified.
As is the case with estate tax filings, penalties for misstated and, especially, for over-stated values in these reports can be costly, both to the taxpayer, and to the appraiser. Penalties range from 20 - 40%.
There are several exceptions to this requirement, explained in detail in IRS Publication 950.
Charitable donations with values of $5,000 or more must be documented by a qualified appraiser whose findings must be attached (as part of IRS Form 8283) to the tax return. If Form 8283 is not attached to the return the deduction will not be allowed unless the taxpayer’s failure was due to reasonable cause ,or a good faith omission, and not willful neglect. In the former cases, the IRS will usually grant the taxpayer 90 days to comply.
Gift and Charitable Giving appraisals are, like estate appraisals, determined at Fair Market Value
Submissions for tax deductions for gifts and donations must be accompanied by a properly prepared Fair Market Value Appraisal and IRS Form 8283. The requirements for these appraisals are rigorous and submissions are strictly reviewed. These appraisals are a particular specialty of Read & Mullin. This particular painting was the subject of a Read & Mullin appraisal for a museum donation.
How much Can You Give Tax-free?
The current exclusion is $14,000 per person, or $28,000 per married couple.
Non-taxable (Excluded) Gifts
Gifts to one’s spouse, gifts to a political organization, gifts to charities.
Date of Appraisal
The appraisal made for submission to the IRS for a gift or donation deduction must be made within 60 days of the contribution.
Prohibited Appraisal Fees
Appraisal fees calculated as a percentage of the value of the subject property (or as a percentage of the eventual allowable deduction) are prohibited by the IRS.
IRS Form 8283
This form must be completed and attached to your return if the value of the donated property exceeds $5,000.
Equitable Distribution Appraisals
When family members divide estates, when couples divide marital properties in divorce cases, and whenever a collection of pieces must be appraised in a way that gives each piece absolutely equal weight relative to the others, an equitable distribution appraisal offers a good solution.
Neither a fair market nor an insurance valuation would work well in these cases; the first tends to favor pieces that sell well at public auctions, and the second tends to favor those pieces that bring the highest retail prices at dealers’ shops. A properly-executed equitable distribution appraisal balances these inequalities.
How? The most effective way to maintain this balance is to value each piece in the market where it would sell to its best advantage. So, the values for French furniture are set at Paris market levels, for example, German porcelain, Old master prints, and fine Japanese swords in the markets where they would sell best. The resulting document is in essence, a report detailing what would happen if one packed each piece up and sent it away to its ideal market.
These appraisals are more theoretical than practical, but they successfully maintain the desired balance level among a variety of different pieces in a variety of different categories, which is the goal.
These appraisals are unique and require a set of standards unlike those found in most others. Each piece must be valued in direct comparison to the other pieces in the group, to achieve the goal of fairness. An accurate, overall parity of values is the ideal in these projects. When the markets comprised in a single document are as diverse as those for carpets, porcelain, Georgian furniture, and old master paintings, the challenges in these projects become apparent.
When are these appraisals appropriate?
In cases of division of diverse properties, where each piece must be value on an equal basis with all others.
Who is qualified to do this?
Only appraisers with an extensive knowledge of local, national, and international markets should prepare these documents.
How do Equitable Distribution values compare with Fair Market and Insurance valuations?
Some will be higher, some lower; no formulaic comparison can be made. The values in these reports will differ from the others throughout the entire document.