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Appraisals for Estates and trusts

Relatively few appraisals are for estate tax purposes because of the $11.58 million exclusion. I discuss them below for mostly informational purposes.

Most appraisals are done for determining a new basis when the property is sold. For example, the home was purchased in 1960 for $100,000, sells 3/1/16 for $900,000. If the home is sold later for $1,100,000, for example, the gain is set at the capital gains tax rate. However, there are exemptions. Such as a surviving spouse has a $250,000 exemption on the sale of the house and no taxes are due since the profit was at the $250,000 limit.

I have no idea why relatively few people get appraisals when a person dies, especially the first spouse. The tax savings can be huge.

Erase CU, UAD, 1004mc and current value from your mind when doing any non-lender work, including estate appraisals.

You are subject to USPAP and some IRS requirements, including the definition of value, discussed below. You are doing a retrospective value, not a current value.

Of course, be sure to do what your state regulator wants to see in your reports. For example, my state regulator focuses on adjustment support, so I quit including any dollar adjustments in my appraisals. I use qualitative analysis.

NEVER USE A FANNIE LENDER FORM SUCH AS 1004. THEY ARE ONLY FOR LENDER USE. USE A GPAR FORM OR OTHER NON-LENDER FORM IN YOUR APPRAISAL FORMS SOFTWARE.

You MUST make a commitment to accepting estate/trust appraisals first, before lender work to get much of this type of work

Getting established in this business can take quite a while. But there is considerable repeat business. You lose repeat business when you turn down this work when you are busy with lender work. Most appraisers only accept these orders when business is slow. That is not a good time as there is considerable competition.

Turn times
They are typically relatively long for date of death, except when the trustee needs to file a tax return soon or a 706 form for date of death.

They are relatively easy to fit in with lender appraisals. I quote turn-times much longer than for lenders and seldom have any issues. Mine range from 2 to 6 weeks, depending on how busy I am.

Large estates are often months.

If you are doing current value, such as for a sale to a tenant, they usually want it faster.

Value pressure
I very rarely have value pressures, even with estates subject to the federal estate tax.

However, I prefer to find out if there are multiple beneficiaries and where they live so I can put in more detailed market information. Sometimes they question my value, usually after using Zillow.

I make it very clear that my values are not high or low. They are the most probable values.

There is also sometimes confusion among beneficiaries about retrospective vs. current values if prices are changing. This typically happens when the current sales price is different from my retrospective value.

Don’t do low appraisals
Frequently, prospective clients say they want “low” or “high” appraisals. I do all my appraisals, whatever the purpose, as the typical sales price, not high or low. I tell them that if not everyone likes my appraisal it is probably okay.

Almost all my estate appraisals are to establish a new basis for properties to be sold on the future, so a high appraisal works better. Sometimes a low appraisal is “wanted” so the estate tax will be lower if the estate is over the $11.56 million limit for taxes.

I have heard of some appraisers who “help them out” and give them a “low appraisal”. Don’t do it, if only because they may use the value for a private sale to a neighbor.

I always let the executor know that the value is not today’s value. Sometimes they use it to determine the current sales price.

If the executor thinks the total property values will be over the limit ($11.58 million in 2020), there may be some value pressure.

Don’t appraise the properties low. Why? You are liable to the IRS for your appraisals. They don’t like low appraisals and are always carefully look at them, as this means less money for the IRS.

When are appraisals needed?
Although we usually think of appraisals for estate taxes when someone dies, actually many appraisals are needed for other purposes. As an overview, a non-exhaustive list of when an appraisal could be needed is:
1. Sale to a relative
2. Partitioning an estate among the heirs or beneficiaries
3. Sale to a non-relative
4. Prior to listing the home for sale
5. Partial interests
6. Alternate valuation date – estate tax purposes (if the property value declines
after the date of death)
7. Gifts and gift trusts (to charities or children, typically)
8. Determining the basis for capital gains tax
9. Family limited partnerships and other types of trusts/partnerships

Three dates
In your reports you will have three dates:
1. Effective date of the appraisal. (Usually date of death.)
2. Date of inspection.
3. Date of the report.

Be sure to include all three dates in the appraisal report. I put them in boldface type in the neighborhood section and the reconciliation sections on form reports and in the letter of transmittal and near the value conclusion on narrative reports.

I always include this statement: Appraisal assumes there have been no changes to the subject property between the effective date of the report and the date of inspection. Or, I discuss any changes between the two dates.

When are current value appraisals needed?
Be sure to ask what date of value is wanted, as it is very important when prices are changing.

Examples:
– One beneficiary is buying out the others.
– Partitioning an estate – who gets which properties.
– Sale to a neighbor or tenant.
Others are typically current value. Examples:
– Sale to a non-beneficiary.
– Prior to listing the home for sale (usually so beneficiaries don’t feel cheated by a low sale).

What if you only want to do single family appraisals and/or work in a specific geographic area?
You can hire another appraiser to do the appraisal types you cannot do, or appraisals in a geographic area where you do not work. Or, you can refer the executor or attorney to another appraiser. I have done both. I usually give them another appraiser’s name as I don’t want to manage their appraisals.

I typically do the appraisals on nearby properties, my normal geographic area. For out of the area appraisals, I contact appraisers in those areas to see if they are available. If I know the appraiser, I give the client one name. If I don’t know any appraisers, I ask around and give them several names.

I have them deal directly with the executor, but some appraisers handle the administration on all the appraisals with an additional small fee.

Handling multiple property estates
Some appraisers give a discount for multiple properties and some don’t. I don’t give a discount.

I have done as many as 25 appraisals for an estate. Since I do apartments and commercial, I often appraise all the estate’s properties if they are in my geographic area. It is very easy to mix up the properties, especially if they are homes. I never do more than 3 inspections per day. Be sure to make good notes about what time you did the inspections, or put first, second, etc. on the appraisal file.

Writing up the reports is difficult as it is very easy to get the homes and small apartment properties mixed up.

I try to “equalize” the values. That’s what I did when I worked for an assessor’s office. For example, if I have three similar homes I try to make the values reasonably close together. Otherwise, you can get “caught up” in writing appraisals and end up with very different values on similar properties.

Fees
Do NOT charge what AMCs pay. You can get a much higher fee.

I always, always get paid in advance, for fees under $850, unless it is a regular client. I require payment at (or before) the time of inspection.

For larger estates, I require 50% upfront and 50% before the appraisals are delivered.

Executors have a fiduciary responsibility to spend money wisely. Many want to be sure they don’t overpay for services such as appraisals.

When you receive a call, be sure not to just quote a fee. I always ask about their situation.

For example: What is the date of value? (I have been doing appraisals for over 25 years and am familiar with the past.) Do they plan on selling the home? (I can offer advice on fixing it up, the current market, good local agents, etc.) Are the heirs local or distant? (I can provide a report with lots of information for out of the area heirs if needed.)

How many properties do they need appraised? (I can handle all of them and will find qualified appraisers to do the non-local appraisals.)

Do they need a partial interest appraisal?

Bidding
If someone calls and asks first “What is your fee?” I don’t spend much time with them. There is always someone cheaper: A Primary Rule of Business. However, if you are trying to break into the business, lower fees can often work.

I find out about the property, discuss my expertise and experience, etc. If I don’t work the area, I give them the names of other appraisers.

If the caller insists on lower fees, remember that your turnaround time can be long, so you can use the estate appraisal to fill in the slow periods.

Appraisal for a stepped-up basis
No one knows the future of federal estate taxes or when the property will be sold. I always strongly recommend getting an appraisal as of the date of the first spouse’s death to set the basis for capital gains.

Most of my estate work is to establish a new capital gains basis as of the date of death for the “marital exemption”.

This is particularly important when the first spouse dies, as the real estate is a “pass through” to the surviving spouse and no taxes are due at that time “marital exemption”.

When the second spouse sells a property or dies, capital gains taxes are due, but only for an increase over the basis established when the first spouse dies.

When my husband died 13 years ago, I had our properties appraised. Our home had almost tripled in value ($385,000 to $900,000) since our purchase in 1985. When I sold it 4 years later, I paid no capital gains tax.

Who orders the appraisals?
For residential appraisals (up to a few homes or small income properties) I am often called by the executor, who gets my name from a real estate agent or the Internet. Usually, the attorney or accountant asks the executor to obtain an appraisal. This is a common practice in my area, even for larger estates.

For larger estates, the appraisals are typically handled
by:
1.Attorneys (estate distribution, tax issues)
2.Accountants and enrolled agents (tax returns)
3.Beneficiaries of gift trusts
4.Executors and administrators
5.Trustees

Who can do the valuations?
The vast majority of values for the 706 estate tax return on a one home estate are not done by licensed appraisers. This is not the best choice, as appraisals are relatively inexpensive as compared with a very high capital gains on a subsequent sale.

The IRS does not specify that a licensed appraiser has to do the appraisals. The owner can provide a value, a real estate agent, or just about anyone, except for gift returns (see below).

For larger estates, a licensed appraiser is preferred. If the return is challenged, the IRS will bring out their very qualified experts to refute the estate’s valuation.

Last year I did an appraisal for a 10 property, mostly small multi-family, estate where the attorneys had used Zillow. I had to explain why my values were different from Zillow.

If there is no estate tax liability, because of the marital deduction for example, sometimes a letter from a real estate agent is used. However, this “appraisal” will be used for establishing the basis for future taxes and can be challenged by the IRS.

I always mention the possibility of an IRS challenge when the caller is reluctant to order an appraisal or is shopping for a low fee.

Appraisals for gifts
IRS rules for appraisals on gifts is stricter than for estates, primarily due to issues with personal property valuation, such as paintings.

IRS Form 8283, Noncash Charitable Contributions (over $500) requires that the appraiser sign a declaration, including “I declare that I hold myself out to the public as an appraiser or perform appraisals on a regular basis … I understand that any false or fraudulent overstatement of the property value … may subject me to the penalty under section 6701(a).”

When someone donates property to a charity or gives a part annually to their children, an appraisal is required.

Be sure to read the IRS requirements for gifting appraisals. They are strict.

Probate appraisals
When a person dies and the will is probated, an appraisal is needed of the decedent’s assets.

In many states, fee appraisers are appointed by the judge to appraise the real estate. To get these assignments takes some luck (right place at the right time) and persistence (keep trying to get appointed).

In California, probate referees are appointed by the probate court and perform real property, personal property, and business appraisals. There are only a few for each county. They must pass a test and be appointed. Check out your state’s regulations.

Low vs. high values
As in other types of appraisals, such as divorce, I try to go in the mid-range of value. If nobody likes my value, it’s probably okay.

I am usually hired by the executor. They often ask for a low value. But, if they are setting a basis for future sale, a high value is to their advantage. Or, they decide to use your low (or high) value to try to sell the property.

For example, a property is valued at $275,000, rather than $300,000, and is sold 10 years later for $400,000. The taxable gain would be $100,000 if previously appraised at $300,000 and $125,000 if previously appraised at $275,000.

Why do we have a federal estate tax in this country?
It was started to make sure we didn’t have the inherited aristocracy of Europe, where our founding fathers were from. The king and nobility controlled much of the wealth.

What if the federal estate (“death”) tax is repealed or the limit lowered?
Opinions on federal state taxes seem to change regularly, depending on politics, mostly.

No one knows whether or not the current administration will repeal the tax. It is very unpopular but does bring in extra revenue. The estate tax limit is $11.58 million for 2020 and regularly increases.

For most appraisers, relatively few estates are over the $11.58 million exemption. Most appraisals are done to establish a new basis. However, I do get a few larger estate assignments every year where they expect to go over the limit.

How much money is paid annually in federal estate taxes?
Not many people pay estate tax. About 11,300 estate tax returns were filed for people who died in 2013, of which only 4,700 were taxable, less than 1 in 550 of the 2.6 million people who died in that year.

Despite its high tax rate, the U.S. estate tax accounts for less than 1 percent of total federal revenue. In 2014, the estate tax raised $19.3 billion according to the OMB, or 0.6 percent of total federal revenue of over $3 trillion.

According to a 2015 report from Congress’s Joint Committee on Taxation,4,700 estate tax returns reporting tax liability were filed in 2013, out of 2.6 million total deaths in the United States. That means the estate tax hits roughly 0.2% of Americans, or 1 out of every 500 people who die.

The maximum tax rate is 40%. According to the Tax Policy Center, the average effective tax rate for those who paid the estate tax in 2013 was 16.6%. There are lots of loopholes, so some very wealthy people don’t pay much.

How many states have estate taxes?
Many states have eliminated estate taxes as they are very unpopular.

Currently, fifteen states and the District of Columbia have an estate tax, and six states have an inheritance tax. Maryland and New Jersey have both. The state with the highest maximum estate tax rate is Washington (20 percent), followed by eleven states which have a maximum rate of 16 percent. Each state has its own exemption.

These rates are much lower than the federal 40% rate if over the $11.56 million exemption.

What about IRS audits?

Every federal estate tax return is hand-screened by experienced estate tax examiners to be classified for audit. The overall audit rate is approximately 20 percent for federal estate tax returns, almost 10 times the audit rate for income tax returns.

The audit rate varies with the size of the return. For example, a $1 million return vs. a $10 million return. A 20 percent estate tax penalty applies for estate gift tax understated valuations if the value is 50 percent or less of the correct value. If 25 percent or less of the correct value, a 40 percent penalty applies.

The IRS examiner’s handbook says that they should request copies of appraisals done within five years of the death and copies of listing information on the subject property within three years of the death.

I only know about one time that the IRS disputed one of my appraised values. It was a highest and best use issue, the most common source of dispute. I appraised vacant land that could be subdivided into single family lots. The access road was very narrow and limited the number of homes that could be built, per the planning department. The IRS said that homes along the road, owned by other people, could be purchased and demolished to make a wide road and allow for more homes to be built. This information was from the executor much later.

Undivided fractional interests
The only use of an appraisal for this purpose is for the IRS. If one owner wants to buy out another owner, I do the appraisal and state that ½ of the value goes to each partner.

First, you appraise the property, then you determine the fractional interest.

Unfortunately, most of the fractional interests are valued by business appraisers or accountants, not real estate appraisers.

The value of the interest is usually less than its pro-rata share. For example, the decedent (or trust) owns a 10% interest in a shopping center worth $1,000,000. The value of the interest is less than $100,000 (1/10 of the total value), as they are very hard to sell, with a limited market.

Some appraisers charge a hefty fee for them, such as 50% to 100% of the cost of the real estate appraisal, and other appraisers only charge $1,000 or less.

Most appraisers don’t do partial interests and tell the attorney to get someone else. But many appraisers could do them if they took the time to get up to speed.

Valuation methods vary widely and there is no specific “acceptable” method. I prefer the marketability method. Other methods used include sales of local partial interests, data services of partial interest sales, and court cases.

Or, the accountant can select a discount rate. Typically, the IRS will not dispute if it is within a certain percentage range.

For more information on partial interest on homes, see the chapter in Frank Harrison’s book “Appraising the Tough Ones”.

Repeat business on the same properties
I regularly appraise an estate’s properties more than once, when another beneficiary dies, they want to sell the properties, beneficiaries are fighting over the value, changing the trust terms, etc.

I have appraised estate as many as 5 times. Last year I re-appraised three properties I did in 2008 as the owner was selling them. I had previously appraised them in 2008 and 2012 when the husband and wife died.

I have learned never to shred any estate appraisal files!

Alternate valuation date 6 months after date of death – if prices are dropping

Since the estate must be at or above the limit for taxation of $11.58 million in 2020, this typically applies to estates with multiple properties and/or relatively high property values or high values of other assets such as stocks.

You will be doing two values: date of death and 6 months after the date of death.

Per the IRS: In general, the alternate valuation election is available if the following requirements are met:
1. The estate must be subject to federal estate tax (in 2017, estates greater
than $11.56 million are subject to federal tax)
2. The use of the alternate date must reduce the value of the gross estate and the amount of federal estate tax due

The estate can use a lower appraisal as of the date of death, or an alternate valuation date 6 months later, if the property has not been sold. This is used when prices have declined since the date of death.

All the estate assets must have values, such as businesses, stocks, etc., not just the real estate.

If the alternate date is elected, all estate assets are valued six months after the date of death. The exception to this is if an asset is sold, exchanged, distributed to a beneficiary, or otherwise disposed of within six months of death. In this case, the asset is valued as of the date of disposition.

I did two large estate assignments in 2017, well over the $11.56 million limit (at that time), just looking at the real estate, not all the assets. One used the alternate valuation date. The other estate did not.

I appraised an estate with 5 properties and suggested using an alternate valuation date. Only one of the properties was a single family home. The others were a 4 unit, 5 unit, and two 26 unit apartment buildings. The person died in February 4, 2016. But, rent control started in Alameda March 2016, after the date of death. Over the 6 month period between date of death and the alternate date of valuation (August 8), rent control had passed and a pro-tenant ballot initiative was on the November 6, 2016 ballot.

If this ballot initiative passed, my city would have one of the strictest rent control laws in the country. The market for apartments stopped in July. There were no sales. If the ballot initiative passed, the market would completely tank. I provided 100-page narrative appraisal reports for the 6-month alternate values. The beneficiaries saved hundreds of thousands of dollars.

That same year in January, I had another estate assignment with 6
properties, but 5 were single family homes. The total, just for the real estate, was over $11.56 million. Single family homes were exempt from rent control and had significantly increasing prices the entire year. I told the executor that using the alternate valuation date would result in a much higher value of the estate.

Bank trust departments
In the past, banks handled many trusts. Appraisers sometimes had to work for lower fees, but they did regular reappraisals of the same properties.

Now, the bank share has dropped substantially, replaced by companies that specialize in trusts. There may be some opportunities, however. Some people continue to use bank trust departments. Contact banks active in your area.

Use the IRS definition of Fair Market Value
Always include this definition in your appraisal reports. It is similar to the Fannie definition. “Fair Market Value is defined as: “The fair market value is 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 relevant facts. The fair market value of a particular item of property includible in the decedent’s gross estate is not to be determined by a forced sale price. Nor is the fair market value of an item of property to be determined by the sale price of the item in a market other than that in which such item is most commonly sold to the public, taking into account the location of the item wherever appropriate.” Regulation §20.2031-1

IRS appraisal requirements
IRS expects appraisers to use USPAP for guidelines.

Erase lender requirements from your mind. For example, using expired listings, sales that closed after the effective date of the appraisal, sales 6 months old, etc. are okay per USPAP. I have done this, and many more non-lender-guidelines in my non-lender appraisals.

A few links
4.48.6 Real Property Valuation Guidelines
www.irs.gov/irm/part4/irm_04-048-006

The IRS has a list of appraisers whose appraisals cannot be submitted to the IRS. See the reference below.

Regulations Governing Practice before the Internal Revenue Service Treasury Department Circular No. 230 (Rev. 6-2014)
www.irs.gov/pub/irs-pdf/pcir230.pdf

What about liability?
There is probably much less liability for these types of appraisals than for lender appraisals because there are many fewer estate appraisals and no disgruntled borrowers I very seldom have anyone contact me about estate appraisals except when I get interior photos mixed up.

Engagement letters
I have engagement letters for all appraisals. But, sometimes I don’t do them if there is just one home.

I have a master engagement letter that I modify for each assignment.

The Appraisal Institute has sample letters at:
www.appraisalinstitute.org/professional-practice/professional-practice-documents
/sample-agreements-for-services/

Or, google engagement letter and Appraisal Insititute.

Accountant market
Accountants filing estate tax returns want to be sure there are no problems. They will often try to get the taxpayer to get an appraisal from a qualified appraiser if they think the estate will be over the current exemption.

Many accountants are aware of the stepped-up capital gains basis issues and will try to get a current value even if no estate tax return is filed. You need to persuade them that an appraisal is more credible to the IRS than a letter from a real estate agent or the owner’s opinion of value.

Higher net worth people are more likely to need appraisals for tax planning and filing. Larger CPA firms with high income individuals are a possibility. Ask your accountant who handles that type of client. Enrolled agents (specialize in tax work) are another possibility.

You could try a mailing before tax lien dates. Or, advertise in a local accountant newsletter or state publication. Networking with local CPAs can also work.

Non-profit market – gifting
Organizations that administer gift trusts, such as hospitals, colleges, and other non-profit groups, need appraisals. Contact them directly. Many advertise in local newspapers or magazines.

Attorneys
Attorneys are the source of most estate and trust appraisal assignments, if only because they tell the executor to get an appraisal. For smaller estates, you may be contacted by the executor instead of the attorney.

Marketing to attorneys is primarily by referrals, but you can also send brochures and letters to attorneys who specialize in this work. Get a copy of your local Bar Association’s directory to see who specializes in estate, trusts, and probate.

Contact any attorneys you know and tell them you’re interested in doing appraisals for estates and trusts. Ask them which attorneys specialize in that market.

Join a local chapter or group of attorneys specializing in this type of work. You will get more work if you are active.

Once you get work from an attorney, you can form a relationship for future work and referrals.

Internet advertising
About half my business comes from my web site, which I set up in 1998. My “tag line”, on every page of my web site, is ” Looking for a local appraiser for Estate and Trust appraisals in Alameda, California? Go to About Us!”

I come up at the top of the search due to my free Google business listing.

Referral sources
Referrals for estate, trust, and gift appraisals can come from just about anywhere. Many of my referrals come from real estate agents as have been going on open house tours almost every week since 1990. They all know me. Some come from local accountants, a neighbor, the Chamber of Commerce members, etc.

Should you do this type of work?
Many appraisers hate working for AMCs, which have ruined residential lender appraising.

It is not very different from other non-lender work. Mostly you have to forget about lender requirements and only use USPAP. Sometimes there are special requirements, such as using the IRS fair value definition.

Estate/trust work does not require expert testimony which many appraisers don’t want to do.

I don’t really know why so few appraisers work for estates and trusts. There is seldom much turnaround pressure, few or no payment problems, and good fees. Any value pressures, if any, are typically much less than for lenders.

If you are serious about doing this type of work, you MUST make a
commitment to accepting estate/trust appraisals first, before lender work.

Much of the business is by referral, so you need to get your name well known in the legal, accounting, and real estate communities.

Where to get more information
I have been writing about doing non-lender appraisals since I started my newsletter in 1992.

In this brief article, I can only touch on some of the most important points in estate taxation. Being knowledgeable about estate, trust, and tax issues makes
your appraisal services more marketable and convincing. The estate tax laws and issues are complicated and keep changing.

Classes and seminars are available in many communities. Check at your local adult school or college. Many books have been written for laypersons on estate planning, probate, and trusts.

Check at your local library or book store. Books published by Nolo Press are well written.

Lots more appraisal business tips