The Difference Between Insurance and Estate Appraisals
April 1, 2003
Some clients of insurance companies have expressed reluctance to appraise and insure their jewelry, fine art, furniture and other collectibles for fear that the IRS would use insurance appraisals during estate settlements. Clients cite the potential negative financial impact of a replacement cost appraisal as a possible tool for the IRS to use for estate valuation purposes.
However, these fears are basically unfounded and it would be foolish for a client to risk the total loss of personal property for lack of insurance because of a mistaken belief in negative IRS consequences.
While it is currently true that estates over $675,000 must have all assets, including fine arts, valued for estate tax purposes, it is wrong to believe that an insurance appraisal could serve this purpose. Estate appraisals and insurance appraisals differ significantly and under no circumstances could an insurance appraisal be used as a basis for an estate appraisal or in place of it.
Insurance appraisals are generally based on replacement value, which is defined by the Appraisers Association of America as: The amount it would cost to replace an item with one of similar and like quality purchased in the most appropriate marketplace within a limited amount of time. Although an insurance appraisal is written as of a specific date, the valuation is generally expected to be broad enough to last for several years, depending on the volatility of the market for a particular work of art.
Estate appraisals, on the other hand are required by federal and state regulations to be calculated as of the date of death. Federal regulations require appraised values to be calculated at fair market value, which is defined as: the price that property would sell for on the open market between a willing buyer and a willing seller, with neither being required to act and both having reasonable knowledge of the relevant facts.
Fair market value is generally lower than replacement value because the seller of
a work of art will normally sell the art to a dealer. Dealers are the most frequent and dependable buyers at auctions and are the most readily available candidates to purchase a work of art through a private sale from an estate.
Since dealers are expected to mark up the price of an object once it is offered for sale it is logical that the price the dealer would pay to purchase the art would be lower than the price the dealer would put on it in a shop or gallery. Consequently the full retail price used for replacement value on insurance policies, in most cases, is considerably higher than the projected fair market value used in estate appraisals.
Notwithstanding this reasoning, it is understandable that there is a certain amount of paranoia from prospective purchasers of insurance policies that the IRS may find, among the papers of the deceased, a prior insurance policy and compare this with a recent date of death estate appraisal.
However, the IRS has assured the Appraisers Association of America that field examiners do not hunt down insurance policies and appraisals for comparative purposes. And if they did, these appraisals would have no legal significance when confronted with a properly prepared estate appraisal, for the reasons cited above.
Upon occasion the IRS has asked for insurance appraisals, but the reason for this is to make sure that all the items which had been insured by the deceased are accounted for in the estate appraisal. An appraisal written by a qualified appraiser, who understands all the IRS rules and regulations and the market economics which constitute the basis of fair market value, should have no trouble withstanding scrutiny by the IRS or the courts.
In any case, an owner of an art collection or a household with pieces that should be scheduled on a fine arts policy would be foolhardy to deny him or herself the security of a proper insurance policy for the fear of a situation which has little basis in reality and which would be legally untenable.
Victor Wiener is the executive director of the Appraisers Association of America, Inc. and an adjunct assistant professor on the faculty of New York University’s School of Continuing and Professional Studies.