Fair Market Value vs. Insurance Appraisals

Tax Form

Briefly Legal is a monthly column in DOYLE Notebook. It is contributed by Lindsey Friedman, Esq. of Doyle’s Estate and Appraisal Services Department. Briefly Legal profiles current stories in the news and focuses on topics related to art law, estate planning and fiduciary practice.


NEW YORK, NY -- Formal fair market value appraisals are required for taxable transfers and must be included with the Federal Estate Tax Return, Form 706 or for the Federal Gift Tax Return, Form 709. Fair market value appraisals are also required for charitable donations where the value is above $5,000.  As per Treas. Reg. § 20.2031-1(b), fair market value is defined as the price at which the 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 the relevant facts. Fair market value is generally determined by looking at comparable sales of property on the auction market since this is the principal market of open exchange and also provides publicly accessible sale records. Additionally, fair market value appraisals should include the buyer’s premium in accordance with Technical Advisory Memorandum 9235005.

For insurance purposes, a different type of valuation is used to determine the value of property, the Retail Replacement Value. This valuation is defined by the Appraisers Association of America as the highest amount that would be required to replace a property with another of similar age, quality, origin, appearance, provenance and condition within a reasonable length of time in an appropriate and relevant market. The Appraisers Association also states that, when applicable, sales and or import tax, commissions and premiums are included in this valuation. There is often a discrepancy between fair market value and retail replacement value since it may take an extended amount of time to find an item of similar nature to appear at the auction market. Instead, the retail market is used for this type of valuation in order to replace an item in the most convenient amount of time.

For fair market value appraisals for estate administration purposes, personal property such as artwork, furniture and jewelry that the decedent owned at the date of his or her death, is included in their gross estate. The property is then valued at its fair market value as of the date of the decedent’s death. Treas. Reg. § 20.2031-6(a) recommends that the appraisal report include a room by room itemization of household and personal effects.  All articles should be named specifically and given a separate value, except when a number of articles contained in the same room have an individual value of less than $100. Such items may be grouped together in one entry. Treas. Reg. § 20.2031-6(b) further states that, if there are included among the household and personal effects articles having marked or intrinsic value of a total value in excess of $3,000 (e.g., jewelry, furs, silverware, paintings, etchings, engravings, antiques, books, statuary, vases, oriental rugs, coin or stamp collections), the appraisal of an expert or experts, under oath, shall be filed with the return.

Once the appraisal is complete and a fair market value has been assigned to the personal effects in the decedent’s estate, the executor or personal representative may wish to sell the tangible personal property.  IRC § 1014 states that upon the death of the decedent, the property in the estate shall receive a stepped up cost basis to the fair market value as of the date of the decedent’s death.  This becomes advantageous to the beneficiary since the capital gains tax essentially disappears if the beneficiary were to sell the work close to the date of death and no appreciation has occurred.  For instance, if the decedent originally purchased a work of art for $100,000 during their lifetime and, upon death, the fair market value is $1 million, if the beneficiary were to sell the work at $1 million then would not incur any capital gains tax.  Thus, the fair market value appraisal ultimately provides the beneficiary with the stepped up cost basis as well as an awareness of what the property should be sold for on the open market.

As per Estate of C. Scull v. Commissioner, T.C. Memo. 1994-211, if an estate’s collection is sold close to the date of the decedent’s death, that sale amount is considered to be the best evidence of the property’s fair market value. The court also stated that the value of art sold at public auction is to include the hammer price as well as the buyer’s premium. However, IRC § 2053 may allow the estate to deduct the amount of the buyer’s premium as an administrative expense. Treas. Reg. § 20.2053-3(d)(2) states that expenses for selling property in the estate, such as the fees of an auctioneer, are in fact deductible if the sale is essential in paying the decedent’s debts, expenses for administration, taxes, or to effect distribution. The question is whether or not it is necessary to sell the property in order to pay such debts. For example, if an estate has a work of art valued at $10 million and the rest of the estate is made up of assets worth $4 million, the artwork may need to be sold in order to provide liquidity to pay estate taxes and other costs of estate administration.

In conclusion, the fair market value appraisal is an important part of estate administration and the knowledge and expertise of the appraisers provides trust and estate professionals with an essential component of the probate process. 


Sources:
Slugg, Ramsay H. Handbook of Practical Planning for Art Collectors and Their Advisors. American Bar Association, 2015.
http://www.appraisersassociation.org/index.cfm?pageId=784
http://www.withersworldwide.com/uploads//art_auctions_and_fair_market_value_for_estate_tax_purposes.pdf
https://www.law.cornell.edu/cfr/text/26/20.2031-6

https://itsartlaw.com/2017/05/19/in-the-eye-of-the-beholder-appraisals-of-art-for-estate-tax-liability


-- With contributions by David A. Gallager, Executive Director, Furniture & Decorative Arts, and Senior Estate Appraiser