"When Do You Need An Estate Tax Appraisal"

"Understanding Estate Tax, Reporting to the IRS and the Definition of Fair Market Value"

The executor of an estate must file a Federal estate tax return if the value of the gross estate at the date of death exceeds the allowed unified credit exemption equivalent which is increasing to $3,500,000 effective for decedents dying on or after January 1, 2009.

Http://www.irs.gov/businesses/small/article/0,,id=164871,00.html is a link for complete information. Bosch Appraisal does not advise our clients in this regard. Please contact your certified accountant or probate attorney to attain information specific to your estate's situation.

Federal estate tax applies to the transfer of property at death. The estate of a person who died (the decedent) is liable for the tax on the entire taxable estate including all property, real and personal, tangible and intangible, wherever situated.

Generally, the value of the decedent’s property interest for estate tax purposes is the Fair Market Value determined on the date of death. Section 2032 of the Internal Revenue Code (IRC) provides an alternate valuation date which is six months after the date of death. If the alternate valuation date is elected, any property distributed, sold, exchanged, or otherwise disposed of within six months after the date of death must be valued as of the date of disposition. The purpose of this election is to provide tax relief for estates that experience a decline in value shortly after death. The alternate date election is only allowed if it decreases the value of the gross estate and the net estate tax liability.

For further information regarding Estate Taxes please visit:
http://www.irs.gov/businesses/small/article/0,,id=164871,00.html
or contact your estate accountant or attorney.

FEDERAL ESTATE TAX - REPORTING TO THE IRS

The value of the decedent’s estate is reported on Form 706 (U. S. Estate and Generation Skipping Transfer Tax Return). Form 706 records a “snapshot” of the net financial affairs of the decedent, i. e. it is a freeze in time of the value of the estate. Form 706 must be filed if the decedent's gross estate exceeds the unified credit exemption equivalent. If the value of the estate is less than the exemption equivalency, the estate may still file Form 706.

This is commonly done to establish a new basis for the property and/or to start the tolling of the three year statute of limitations for the IRS challenging the estate. Establishing a “stepped-up” basis may reduce the transferee’s capital gains tax in the event the property is subsequently sold. Form 706 records personal property on Schedule F - Miscellaneous Property (ILL-29).

Form 706 and Treasury Regulation Section 20.2031-6 (see ILL-30) governs issues relating to the valuation of household and personal effects for estate tax purposes and state that:

1. A room by room itemization of household and personal effects is desirable.
2. All articles should be named specifically. Items contained in the same room and each of which is valued at $100 or less apiece may be grouped.
3. If the decedent owned at the date of death, articles with artistic or intrinsic value (i. e. jewelry, silverware, books, statuary, vases, oriental rugs, coin or stamp collections, appreciating antiques etc.) and if any one article is valued at more than $3,000. or any collection of similar articles is valued at more than $10,000, then an appraisal by a qualified appraiser is required to be submitted along with the appraiser’s qualifications. (Form 706) (See ILL-29)
We include comparables within our reports for individual items valued at $3,000. or above or any collection of similar articles valued at more than $10,000. to satisfy new requirements according to the Uniform Standards of Professional Appraisal Practice.

WHAT CONSTITUTES A "COLLECTION?"

The term "collection" means a gathering of similar items of like artistic or intrinsic characteristics. There is sometimes confusion as to what constitutes a "collection." If an item is "artistic or has a collectible value," (i. e. jewelry, silverware, books, statuary, vases, oriental rugs, coin or stamp collections, appreciating antiques etc.) and one singular item is valued at over $3,000., that item will need to be listed on the estate asset list with an accompanying appraisal. In addition, a group or "collection" of items that together total over $10,000. need an appraisal, whether they are a mixed group of oil paintings by various artists or a set of paintings by the same artist, both are considered to be "collections" by the IRS, if together they total over $10,000.

DEFINITION OF FAIR MARKET VALUE

The legal definition of Fair Market Value as defined by IRS Regulation Section 1.170A-1(c)(2) defines Fair Market Value (FMV) as “the price at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts.”

You will notice the definition says, "price at which property 'would' change hands between a buyer and a seller." The concept of Fair Market Value is hypothetical and is used when property is not being sold but ownership of the property is changing and the property needs to be assigned a value at the time of transfer. FMV Appraisals are used for reporting estate tax to the IRS, for equitable division of personal property to heirs of an estate, for the establishment of a trust, for equitable division of property in a divorce and for non-cash charitable donations of personal property. Items being appraised for FMV are compared by the appraiser to recent sales of similar items sold in the market in which these items are most commonly sold to the general public.

The concept of fair market value assumes that a reasonable time is available in which the transaction can occur. Allowances are made for such necessities as transporting, cleaning, repair, advertising, and conducting of the sale. Reasonable time is of sufficient duration that the seller is not under compulsion to sell, i.e. the sale is not considered as being under distress.

CAN FAIR MARKET VALUE EVER BE RETAIL?

Treasury Regulation Section 20.2031-1 provides that property in the decedent’s estate that is normally obtained by the public in a retail market (as opposed to a wholesale or liquidation market), fair market value is the price at which a comparable item would be sold at retail. Section 3 of Revenue Procedure 65-19 (see ILL-32) specifically addresses the issue of items commonly sold at auction or through classified advertisements:

“Where there is a bona fide sale of tangible personal property as a result of an advertisement in the classified section of a newspaper and the property is of the type often sold by owners by such means, or there is a bona fide sale of an items of tangible personal property at public auction, the price for which it is sold will be presumed to be the retail sales price of the item at the time of sale.”

For estate tax purposes, if the decedent’s property is sold at public auction or through classified ads the resulting prices realized are acceptable as fair market values providing the sale is completed within a reasonable time and assuming that no dramatic change in the market occurs between the effective date of the appraisal and the date of sale. Section 3 of the Revenue Procedure 65-19 states:

“Such retail sales price also will be presumed to be the retail sales price of the item on the applicable valuation date if the sale is made within a reasonable period following the applicable valuation date and there is no substantial change in the market conditions or other circumstances affected the value of similar items between the time of the sale and the applicable valuation date."

Resources:
IRS Pub 559, Survivors, Executors, and Administrators
IRS Form 706 United States Estate Tax Return (ILL-29)
Revenue Procedure 65-19, Classifieds and Auctions as Sources for Retail Sales Prices
Revenue Procedure 66-49, Appraisal Guidelines and Formats
Treasury Regulation Section 20.2031-1, Definition of Gross Estate
Treasury Regulation Section 20-2031-6 Valuation of Household and Personal Effects
Certain excerpts used with permission from the International Society of Appraisers from their Appraiser’s Core Course Federal Estate Tax Appraisals Update, 2002