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Read and Mullin Estate and Insurance Appraisal of Watercolor


Watercolor and goauche on wove paper.

Provenance: Passed down to current owner by bequest.

Appraisal 1: Estate appraisal at Fair Market Value.

Appraisal 2: Insurance appraisal at Replacement Cost to protect the new owner from loss.

Estate Appraisals

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.

Insurance Appraisals

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.

Gift Appraisals

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.

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.

Damage and Loss Appraisals

After-the-fact damage appraisals commonly include a repair, restoration, or conservation report and two values; the value of the piece prior to the damage, and the value of the piece after its proposed restoration. In most cases, the restored value will be lower than the pre-damage value. In some cases it is the same, in others, not commonly, it can be higher.

Each year we confront cases where the restoration process has done more harm to the piece than the accidental damage. It is important that the appraiser in damage and loss cases have solid experience in various restoration processes, especially in the areas of furniture, paintings, and porcelain. In these and in many other areas, it is essential that the correct restoration processes be employed.

There are two rules of thumb in the restoration process; first, do no harm; second, do nothing that cannot be reversed. Owners of furniture and paintings should be especially aware of the fragile nature of the surface patinas of these works, and the dramatic loss of value that may occur when these old surfaces are altered.