Self-Insufficiency

Posted on November 1, 2022 by Bill Hoefer, GIA GG, FGA

Are the USPAP standards required for estate appraisals? Appraisers that undervalue an estate can be subject to fines by the Internal Revenue Service. Fair market value is greatly misunderstood on meaning and methodology and is not always the price realized at auction. Remember your draconian teacher that changed the rules on homework? She demanded that you write your first and last name in the upper left-hand corner of your homework papers. Additionally, you had to add the assignment title, class period, and date. Not any date but one that had a formal format with the month spelled out. If you did not do so, she either reduced your grade a level, gave you an F, or returned the paper as incomplete! But wait, was she preparing you for that day when you would be rendering an appraisal for estate tax liability? IT IS A PRIVILEGE TO BE TAXED Most appraisers understand that estate appraisals are for a settlement of a decedent’s estate. Well, yes and no. An estate could be settled merely by dividing the property amongst the heirs. But there is a most important second reason for having an appraisal—to determine tax liability. There are two types of taxes, namely estate taxes and inheritance taxes. Estate tax is a tax on the privilege of settling one’s estate after one has died and lost control of handling their estate. Inheritance tax is a tax on the privilege of receiving property from an estate. The state courts handle the settling of estates.1 There is a federal estate tax but not an inheritance tax. And, yes, some states have an estate tax, and some states have an inheritance tax. If the estate pays federal estate taxes, a pickup tax exists for the state where the probate was handled. Thus, even in states claiming they do not have an estate tax, there is a hidden kickback if federal estate taxes are paid. From an appraiser’s point of view, the estate tax liability appraisal must comply with both federal and state requirements. DOUBLE DATING Whenever one encounters appraisal assignments involving two jurisdictions, expect differences. If the date chosen for federal tax liability is the alternate date and the state of juris- diction does not offer an alternate valuation date, then the appraisal must have two values for two effective dates. Yes, not only can there be a difference in effective dates, but also in value definitions. Yes, the state can have a value definition that is different than the federal definition. The estate tax liability appraisal could additionally be required to follow two value definitions—a valuation foursome.2 WHAT’S FAIR? Although there exist other value definitions, the fair market value definition mandated by the Internal Revenue Service (IRS) is often defaulted to by the states. The “willing buyer and seller” portion is found in almost every fair market value definition and is no surprise. However, the IRS fair market value definition for estate tax liability has a slight twist. It also seeks “... the fair market value of such an item of property is the price at which the item or a comparable item would be sold at retail.”3 This basically asks for the ultimate consumer...

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