For hard-to-value assets, such as closely held businesses, real estate and art, a professional appraisal may be necessary. This article explores situations that call for an appraisal, including retirement and estate planning, gift disclosures and charitable donations.
Whether you’re in the process of making a retirement plan, building an estate plan, or intending to donate property to charity, you need the value of your assets. For many hard-to-value items — such as closely held business interests, real estate, art or collectibles — an appraisal may be necessary.
Retirement and estate planning
To enjoy a comfortable retirement, you’ll need to calculate the income to support your lifestyle when you reach your desired retirement age. What is the income producing value of your assets? When can you afford to retire?
Knowing the value of your assets identifies your potential estate or gift taxes (to identify the need for appropriate estate planning strategies) calculate any transfer taxes, and plan to distribute your wealth fairly. For example, suppose you wish to divide your overall property equally among your children, but with different items going to each. That’s nearly impossible to do without appraisals of hard-to-value assets.
Appraisals may also be necessary to avoid running afoul of tax basis consistency rules. According to these rules, the income tax basis of inherited property equals the property’s fair market value as finally determined for estate tax purposes. The rules are intended to prevent your heirs from arguing that your estate undervalued the property, thus entitling them to claim a higher basis for income tax purposes. Appraisals can help ensure that your heirs receive the basis they deserve.
Gifts and charitable giving
Generally, the IRS has an unlimited amount of time to challenge the value of gifts for gift and estate tax purposes, unless they’re “adequately disclosed.” If they’re adequately disclosed, the IRS is bound by a three-year statute of limitations. The best way to disclose the value of a gift is to include a qualified professional appraisal with a timely filed gift or estate tax return.
Charitable gifts of property valued at more than $5,000 (other than publicly traded securities) must be substantiated with a qualified appraisal by a qualified appraiser; one with certain education and experience requirements.
Know what you have
Without appraisals of your hard-to-value assets, it’s difficult to develop a realistic financial plan, treat your heirs fairly and avoid unwelcome tax liabilities. Asset values can fluctuate dramatically over time, make sure you update appraisals periodically.
The HoganTaylor Tax Practice
If you have any questions about the content of this publication, or if you would like more information about HoganTaylor's Tax practice, please email Tony Otto, Tax Practice Lead, at jotto@hogantaylor.com. You may also contact Denise Felber, Tax Partner, at dfelber@hogantaylor.com
INFORMATIONAL PURPOSE ONLY. This content is for informational purposes only. This content does not constitute professional advice and should not be relied upon by you or any third party, including to operate or promote your business, secure financing or capital in any form, obtain any regulatory or governmental approvals, or otherwise be used in connection with procuring services or other benefits from any entity. Before making any decision or taking any action, you should consult with professional advisors.
