What Is A Qualified Appraisal for Estate Tax Purposes?
What Is A Qualified Appraisal for Estate Tax Purposes?
By - Jeremiah Grant
Last Updated - January 25th, 2024 12:11 PM
Jan 25
Among all things federal taxes, estate tax accounts for only a fraction of the total IRS revenue. In fact, out of the $4.05 trillion tax dollars in FY 2021, only about $18.4 billion accounted for estate taxes.
Nevertheless, if you’re eligible to pay an estate tax, this is a huge deal for you. After all, in the same year, average individual estate taxes accounted for $7.1 million each.
Meaning you simply can’t ignore estate taxes and the labyrinth of estate tax planning that goes behind it.
And it all starts with a qualified appraisal for estate tax purposes, which is a detailed assessment of the total assets that you might inherit or transfer.
You see, when it comes to paying an estate tax, an accurate calculation is essential. So much so that even a small error can result in an overpayment of taxes in the hundreds of thousands.
This is exactly where an IRS qualified appraiser offering business valuation service enters the picture, providing you with a precise dollar value of all the assets put together. Also, they help you calculate the total estate tax.
Wondering what’s more to a qualified appraisal and how it works?
Read on, as I’ve discussed everything about qualified appraisals along with my own appraiser tips for seamless estate planning.
Qualified appraisal for estate tax purposes: What is it?
If you’re in the process of estate planning or estate tax calculation, you’d sure have come across the idea of assessing the total value of all your assets.
A qualified appraisal is simply the process of calculating the value of the assets in question that you plan on transferring or have inherited.
Herein, an independent appraiser with the required IRS qualifications carries out a valuation of the estate and determines its fair market value. This includes everything from properties to businesses to investments to personal possessions and more.
In fact, the appraisal itself is carried out as per the standards set by the IRS to bring transparency and ensure everything is accounted for. The idea here is to make sure that the total worth of the estate is calculated precisely and the taxes paid appropriately.
Now, before we get into the nitty gritty qualified appraisal for estate tax purposes, it’s essential that you understand what estate tax itself is. Also, you should have a fair idea about who IRS qualified appraisers are.
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For starters, an estate tax is a federal taxation that is imposed on the transfer of the estate of a deceased individual. Also called the inheritance tax or death tax by critics, this includes all the assets of the deceased, such as properties, bank balance, cash, jewelry, businesses, and more.
So, how does an estate tax work?
Well, estate tax involves the valuation of all the assets, together called an estate, of the deceased. Thereafter, a certain percentage of federal tax is imposed on the total estate value.
For instance, let’s say you’ve inherited an estate worth approximately $14 million from a deceased family member or relative. In this case, you can expect to be taxed in the 34 percent tax slab.
Who is an IRS qualified appraiser?
As the name suggests, an IRS qualified appraiser is an individual like myself who will carry out the valuation of your estate. And they can be anyone with the right qualifications, certifications, and professional experience.
In all, here are the IRS-required qualifications for an individual to be a qualified appraiser for estate tax purposes:
They should have professional-level coursework relevant to the valuation or appraisal.
They should have at least two years of experience in similar appraisals (estate tax appraisals in this case).
They should be licensed and certified in the state in which the appraisal is being conducted.
For instance, as an IRS qualified appraiser, I carry appraisal licenses and certifications in multiple states. Also, I’ve over 25 years of experience in carrying appraisals for various purposes, including estate planning and taxes.
Most importantly, I ensure an entirely neutral and unbiased estate appraisal, which is the number one requirement of the IRS.
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How does a qualified appraisal work for estate taxes?
Now that you know what a qualified appraisal exactly is, you might well be wondering how it works for estate taxes.
Well, to begin with, a qualified appraiser estimates the fair market value of all estate items at the time of death.
For instance, let’s say you’ve inherited an estate from a deceased relative. Here, the estate value will be calculated as of the date of your relative’s death and not on the date of valuation.
Similarly, the valuation will be based on the fair market value of estate items or assets as of the date of death. Meaning the appraiser will not take into account the value of the assets when they were acquired and will rely on present-day value instead.
Further, as we discussed earlier, the appraisal for estate tax will include all the assets of the deceased person at the time of death. Also called the “Gross Estate” by the IRS, this includes everything from cash to insurance to securities to real estate and more.
In fact, even the personal belongings of the deceased person are counted as “Gross Estate.” For instance, your deceased relative’s personal vehicle, jewelry, etc., are all counted as estate items.
Curious as to how a qualified appraiser calculates estate value and taxation amount?
Let’s have a look at the methods of qualified appraisal.
What are the methods of qualified appraisal for estate tax purposes?
A qualified appraisal for estate tax estimation works similarly to a business appraisal, where an appraiser uses one of the multiple business valuation methods.
But, unlike a traditional business appraisal where the valuation is confined to the firm/company concerned, a qualified appraisal for estate tax covers everything. For instance, apart from the deceased individual’s business, the appraiser will also evaluate the FMV of real estate and shareholdings, to name a few.
As such, the methods of qualified appraisal are different too. And here are some common methods or approaches that you can expect a qualified appraiser to follow:
1. Cost approach
The cost approach is, by far, the most popular method of a qualified appraisal, thanks to the most current valuation that it offers. So much so that out of all the estate tax appraisals that I’ve conducted to date, a majority of clients specifically requested me to follow this method.
You see, the cost approach is based on a straightforward calculation where a qualified appraiser like myself will estimate the present-day cost of the “Gross Estate.”
For instance, let’s say you’ve inherited assets from your deceased relative and are looking to calculate the total estate tax.
Now, by following this approach, I’ll calculate the total cost of all the assets on the date of your relative’s death. Herein, the total cost will be the amount that you can expect to pay for buying similar assets.
Thereafter, I’ll calculate the total depreciation that applies to the assets in question and subtract it from the total cost. This will give me the fair market value of the “Gross Estate.”
2. Income approach
The income approach to qualified appraisal is also called the income capitalization approach and is the second most popular method. And as you might already have figured out, this approach is based on the total income that the “Gross Estate” can generate.
The idea is to calculate the total revenue or income that all the estate items can create combined.
For instance, to calculate the fair market value of your inherited assets, I’ll determine the total income that they’d have created on the deceased’s date of death. And to do so, I’ll first estimate the net operating income of the assets, i.e., the revenue they generate minus the expenses you incur.
Once I’ve got a net operating income, I’ll divide it by the capitalization rate or the expected rate of return. The resultant value will, thus, be the fair market value of
3. Comparison approach
Finally, we’ve got the comparison approach, which is also called the sales comparison approach. And to calculate the FMV of “Gross Estate” using this approach, you’ll need publicly available comparable data of similar “Gross Estates.”
For instance, to evaluate the fair market value of your assets using the comparison approach, I’ll examine the value of at least three similar estates. And to that end, I’ll use comparable data that isn’t older than a year.
But there’s one catch with this method that you should be aware of.
You see, while the comparable approach provides reliable data for FMV valuation, the only major problem is the lack of relevant data. For instance, sourcing the publicly available value of similar-sized “Gross Estates” has been my worst nightmare.
Also, it goes without saying that the lack of data/information means less reliable valuation. And this can complicate the overall estate tax filing process.
Why is a qualified appraisal for estate tax important?
When it comes to paying estate tax, you can’t be more careful in calculating the total taxable amount. In fact, the importance of this calculation is at par with that of other federal taxes.
After all, the IRS legally requires you to pay an appropriate amount of tax. So, the consequences of even a small miscalculation can be severe.
And this is exactly where a qualified appraisal comes in handy, providing you with an accurate taxable amount based on the FMV of your “Gross Estate.”
In all, here are some reasons why a qualified appraisal is essential for estate tax purposes:
1. Provides the required fair market value for your assets
The IRS regulations require you to calculate the fair market value of all your assets. And the percentage of tax that you pay on your estates is based on this valuation.
Now, a qualified appraisal involves a third-party appraiser like myself who ensures neutral and unbiased evaluation. This, in turn, guarantees that your assets are valued accurately and that you remain compliant with federal laws.
You see, in the absence of a qualified appraisal, there’s a good chance that you might undervalue or overvalue your assets. And this can ultimately lead you to pay an incorrect estate tax, thus inviting unwarranted liabilities or incurring losses by overpayment.
2. Helps defend your filing in tax disputes
It is commonplace for the IRS to flag discrepancies in tax filings if they suspect misappropriation or an inaccurate tax payment. However, the fact that your estate tax filing is based on a neural third-party assessment of asset value can provide you with a legitimate defense.
As such, you can challenge the IRS red flags, negotiate with the agency, and arrive at a mutually acceptable resolution.
3. Shields you from IRS penalties
The IRS penalties for underpayment of estate taxes can be severe, just like any other federal tax. Nevertheless, a qualified appraisal can save you from that.
Qualified appraisers are known for their precise assessments, which means the estate tax you pay will be accurate. As a result, you can have a seamless estate inheritance and avoid paying hefty penalties.
Qualified appraisal for estate tax purposes: Frequently Asked Questions
What can be the consequences of incorrect appraisal for estate tax?
As we discussed earlier, the IRS regulations require you to pay estate tax after an accurate, fair market valuation of your assets.
In case the appraisal is inaccurate, this will result in an incorrect tax payment and possibly an underpayment of tax.
Now, the IRS has laws in place that impose strict penalties on such tax payments. And this can range anywhere from monetary penalties to civil and even criminal proceedings under charges of fraud and misrepresentation.
In short, it is essential that you file an appropriate estate tax, which in return calls for hiring a trusted appraiser.
What is the IRS Revenue Ruling 59-60?
The IRS Revenue Ruling 59-60 deals mostly with businesses and has set forth certain requirements regarding qualified appraisals for estate tax purposes.
Herein, the IRS requires estate tax valuations to provide some specific information regarding the business in question, which includes:
The kind of business and its operational history
The overall financial condition of the business
The value of the business’s stocks
The business’s earning capacity
Intangible value associated with the business, such as general goodwill
The overall conditions of the industry that the business is operating in
A qualified appraisal for estate tax purposes goes a long way to ensure an accurate fair market valuation of the “Gross Estate.” And consequently, this allows you to pay the right amount of estate tax on your inheritance and steer clear of potential liabilities.
However, if you’re in the middle of estate planning or are exploring an estate tax payment, I can’t overstate the importance of an IRS qualified appraiser.
You see, the IRS specifically requires the appraisals for the estate tax to be conducted by a qualified appraiser. So, ignoring this step is like inviting IRS scrutiny and a subsequent penalty.
In the same way, when choosing an appraisal method for evaluating your assets, I suggest you avoid the comparison approach. That’s because there’s a clear lack of comparable estates, especially those that were assessed in the last year.
Wondering how to hire an IRS qualified appraiser or choose the right appraisal method?
You can get in touch with us and schedule a no-cost consultation. At Arrowfish Consulting, we’re seasoned IRS qualified appraisers with over 200 years of combined domain expertise. So whatever be your estate tax appraisal needs, we’ve got you covered.
Jeremiah Grant
Jeremiah Grant is the Managing Partner of Arrowfish Consulting. In addition to acting as a primary liaison for many of the firm’s engagements, He primarily focuses on business valuation and economic damages expert witness assignments, in addition to forensic accounting and insurance claims analysis.
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