Having Your Collection Appraised

Appraisals of collectibles and other tangible personal property are an integral part of estate planning. Appraisals are required for estate tax, charitable contributions and gift tax purposes as well as insurance and divorce settlements.

A key element in the process is the choosing of an appraiser. In rare coins, for instance, the appraiser must be familiar with trends in the entire rare coin market as well as the individual specialization areas he or she may have in order to accurately provide appraisals that can be submitted to the IRS.

Most rare coins are easier to evaluate than most other forms of tangible assets due to the wide empirical database that exists. U.S. rare coins have independent pricing guides that are published weekly, recognized, independent certification services and a strong established auction history. However, some rare coins are rather esoteric and require a skilled appraiser to evaluate the factors of provenance, rarity, variety, type, quality and in cases of uncertified coins, the condition based on contemporary standards.

Appraising artwork and paper collectibles (rare books, comics, and art) often requires an appraiser with a keen eye for the works of particular artists and an acute understanding of the current market for those particular genres of the collectibles. It may be necessary to talk with several appraisers before finding one with the particular expertise that you seek.

It is also important that the appraiser be aware of the IRS rules governing appraisals as set forth in the Internal Revenue Code of 1986, the Treasury regulations promulgated under the Code and interpreting authority. Neither the IRS nor Congress has yet sought to unify the appraisal requirements for income tax, estate tax or gift tax purposes. Crucial differences exist, such as (1) the requirement that certain estate tax but not income tax or gift tax appraisals be made under oath, and (2) the minimum values (e.g. $3,000, $5,000 or $10,000) above which special appraisal requirements apply.

As a result, in contracting for an appraisal to be used for tax purposes, you should take care to state clearly the tax purpose for which the appraisal in being obtained. In addition, you should review the draft appraisal for compliance with the specific requirements.

The most common situations in which tangible personal property must be valued for tax purposes are:

• When a taxpayer claims a charitable deduction on his or her income tax return.

• When an executor values a decedent's personal effects.

• When a taxpayer reports the value of a gift on a gift tax return

Other purposes are discussed in the following paragraphs including regulations governing excess benefit transactions that involve certain exempt organizations. In each case the taxpayer or executor may be required to supply or rely upon an appraisal of the property. The specific requirements are different in each situation.

Income Tax Purposes

The most complicated of appraisal requirements are those demanded of a taxpayer claiming a charitable deduction. For any item of tangible personal property valued at over $5,000 the taxpayer must obtain a "Qualified Appraisal" and attach an "Appraisal Summary" to the income tax return. If any item is valued at over $20,000 the taxpayer must attach the Qualified Appraisal itself rather than the Appraisal Summary to the tax return.

The appraisal regulations under section 170 specify in detail the requirements of a Qualified Appraisal. These requirements are summarized in IRS Publication 561 "Determining the Value of Donated Property." Taxpayers and advisors should bear in mind that this publication is intended only for assistance in preparing income tax returns, not estate or gift tax returns.

The four general requirements of a Qualified Appraisal are as follows:

1. It must be made not more than 60 days before the date of the contribution of the property to the charity and not later than the due date of the return on which a deduction for the contribution is claimed.

2. No part of the fee for the appraisal can be based on a percentage of the appraised value of the property.

3. It must be prepared and signed by a "Qualified Appraiser" and all appraisers who contribute to its preparation must also sign it.

   1. It must include:

      • A detailed description of the property from which someone who is not generally familiar with the type of property could recognize this particular item; for certified coins the description should include the certifying organization, such as PCGS, NGC or ANACS and the certification number on the case;

      • A description of the physical condition of the property. For certified coins the grade of the coin on the case is sufficient;

      • The date (or expected date) of contribution;

      • The terms of any agreement that the donor has entered into or expects to enter with regard to the property;

      • The name, address and taxpayer ID number of the Qualified Appraiser or Appraisers and if the Qualified Appraiser is employed or engaged as an independent contractor by another person or firm, the name, address and taxpayer ID number of that person or firm;

      • The qualifications of the Qualified Appraiser who signs the appraisal, including the appraiser's background, experience, education and any membership in professional appraisal associations;

      • A statement that the appraisal was prepared for income tax purposes;

      • The date or dates the property was valued;

      • The appraised fair market value on the date of the contribution;

      • The method of valuation used to determine the fair market value;

      • The specific basis for the valuation;

      • A description of the fee arrangement between the donor and appraiser.

The regulations under section 170 provide very detailed guidelines concerning the qualifications of a Qualified Appraiser. These guidelines are intended to ensure that the Qualified Appraiser is competent to make the appraisal and are sufficiently disinterested to be able to render an honest opinion of value. The regulations provide:

• Certain individuals are not allowed to be Qualified Appraisers, including:

  1. The donor of the property (or taxpayer who claims the deduction);

  2. The donee of the property;

  3. A party to the transaction in which the donor acquired the property, such as the person who sold the property to the donor, unless the donor makes the donation within two months of acquiring the property and claims an appraised value no higher than the price at which it was acquired;

  4. A person who regularly prepares appraisals for one of the above and who does not perform a majority of his or her appraisals for other persons;

  5. A person employed by or related to any of the above persons in (1), (2) or (3) above.

• A Qualified Appraiser must certify on the Appraisal Summary that he or she:

  1. Holds himself or herself out to the public as an appraiser, or performs appraisals on a regular basis;

  2. Is qualified to make appraisals of the type of property being valued because of the qualifications in the appraisal;

  3. Is not one of the excluded individuals named above;

  4. Is not receiving an appraisal fee based upon a percentage of the appraised property value; and

  5. Understands that there is a penalty for aiding and abetting under a statement of tax liability.

• A person cannot be a Qualified Appraiser if the donor has knowledge of facts that would cause a reasonable person to expect that the appraiser will overstate the value of the donated property.

A taxpayer who claims a charitable deduction greater than $500 must attach IRS Form 8283 to his or her income tax return and fill out Section A of the form, which requires information about the donated property and the donation. When a taxpayer claims a deduction for an item valued at more than $5,000, he or she must also fill out Section B of the form. Section B is the "Appraisal Summary."

The Appraisal Summary requires additional information about the donated property as well as the signature of the donee and a certification signed by the Qualified Appraiser containing the representations described above.

In 1996, the IRS issued Revenue Procedure 96-15, which provides the procedures through which a taxpayer may request from the IRS a binding (on the IRS and the taxpayer) "Statement of Value" as to any item of art that has been appraised at $50,000 or more. The taxpayer may then use the Statement of Value to substantiate the value of the property for income, estate or gift tax purposes.

A taxpayer who requests a Statement of Value to substantiate a charitable contribution of property must submit to the IRS a Qualified Appraisal, a required user fee of $2,500 and an Appraisal Summary. Because the taxpayer can request a Statement of Value only after the contribution has been made, the steps outlined in Revenue Procedure 96-15 may be of little practical use to the taxpayer.

A taxpayer seeking a Statement of Value for estate or gift tax purposes must submit to the IRS an appraisal containing certain specified information, a required user fee of $2,500, a description of the item, the appraised fair value of the item, the cost, date and manner of acquisition and the date of death (or alternate valuation date, if applicable) or the date of the gift. Again, obtaining a Statement of Value is often of little practical use to the taxpayer as it just accelerates review of values and is therefore not a help in planning.

Estate Tax Purposes

When an estate includes household and personal effects, the executor must file Schedule F of the estate tax return, itemizing the property and reporting its value. All items of property must be listed separately unless they have a value of less than $100. Items having a value less than $100 and contained in the same room on the date of death can be grouped together. As an alternative to itemizing, the executor may provide a written statement, prepared under penalties of perjury, setting forth the aggregate value of the property as appraised by competent appraisers of recognized standing and ability (or by dealers in the class of property involved).

As a practical matter, in large estates one or more appraisers value almost all "miscellaneous property." The reasons for this include (1) that the alternative to itemizing, mentioned above, requires that executors rely on appraisals by either a competent appraiser or a dealer, and (2) that the Internal Revenue Code prescribes penalties for both undervaluing and overvaluing estate property. These penalties may be waived on a showing of "reasonable cause and good faith," which may be demonstrated by justifiable reliance on a professional appraisal.

In determining whether reliance on a particular appraisal demonstrated "reasonable cause and good faith," the IRS will take into account: (1) the methodology and assumptions underlying the appraisal, (2) the appraised value, (3) the relationship between appraised value and purchase price, (4) the circumstances under which the appraisal was obtained, and (5) the appraiser's relationship to the taxpayer or to the activity in which the property is used.

Certain types of tangible personal property must be appraised separately, specifically, items having marked artistic or intrinsic value in excess of $3,000, such as jewelry, furs, silverware, paintings, etchings, antiques, books, vases, oriental rugs or coin and stamp collections. The appraisal of such items must be made by an "expert or experts" and it must be made under oath, an often overlooked requirement. The appraisal must also be accompanied by the executor's written statement, made under penalties of perjury, as to the completeness of the itemized list of such property and as to the disinterested character and the qualifications of the appraiser or appraisers.

The regulations provide little guidance regarding the preparation of estate tax appraisals. Otherwise, they merely provide guidance for appraisals of specific types of property:

1. Books in sets by standard authors should be listed in separate groups;

2. In listing paintings having artistic value, the size, subject, and artist's name should be stated;

3. In the case of oriental rugs, the size, make, and general condition should be given; and

4. In the case of silverware, sets of silverware should be listed in separate groups, groups of individual pieces of silverware should be weighed and the weights given in troy ounces and, in arriving at the value of silverware, the appraisers should take into consideration its antiquity, utility, desirability, condition and obsolescence.

Additional general and specific guidance for estate tax appraisals has been provided in Revenue Procedure 66-49, which suggests that, for general purposes, an appraisal report should contain as least the following:

1. A summary of the appraiser's qualifications;

2. A statement of value and the appraiser's definition of the value he obtained;

3. The basis upon which the appraisal was made; and

4. The signature of the appraiser and the date the appraisal was made.

Gift Tax Purposes

A taxpayer who makes a completed gift is required to file a gift tax return on IRS Form 709 and, except to the extent of a deduction such as the charitable or marital deduction, pay tax on the transfer at graduated rates based on the value of the gift if the gift generates a tax in excess of the unified credit amount.

The instructions for the gift tax return and the applicable regulations require that the taxpayer attach to the return either a detailed description of the method used to determine the fair market value of the gifted property or an appraisal of the gifted property.

The regulations provide specific guidance regarding the preparation of gift tax appraisals. Although fairly general and applicable to gifts of many types of property, the regulation specify that a gift tax appraisal contain the following information:

1. The date of the gift;

2. The date on which the gifted property was appraised and the purpose of the appraisal;

3. A description of the gifted property;

4. A description of the qualifications of the appraiser;

5. A description of the appraisal process used;

6. Any information considered in determining the appraised value;

7. The appraisal procedures followed, and the reason that supports the analyses, opinion and conclusions reached in the appraisal;

8. The valuation method used, the rationale for the valuation method, and the procedure used in determining the fair market value of the gifted property; and

9. The specific basis for the valuation, such as specific comparable sales or transactions.

The regulations also specify that an individual who meets the following criteria must prepare a gift tax appraisal:

1. Holds himself or herself out to the public as an appraiser, or performs appraisals on a regular basis;

2. Is qualified to make appraisals of the type of property being valued because of his or her qualifications, as described in the appraisal; and

3. Is not the donor or recipient of the property or member of the family of the donor or recipient (which includes spouses, ancestors, lineal descendants and spouses of lineal descendants) or any person employed by the donor, the recipient or a member of the family of either donor or recipient.

The rules for the appraisal of tangible personal property may seem complicated but can become critically important if the advisor engages an appraiser who is not thoroughly familiar with them. For this reason, an advisor should ensure that the appraiser has up-to-date knowledge of both appraisal formats and the marketplace in which the most sustainable comparable values can be found.

Insurance Appraisal

You should insure your collection whether you keep it in a safe-deposit box or at home, and particularly if you exhibit or trade portions of it at shows. Your insurance company will probably want an appraisal prior to granting coverage, but even if they don't, it may be in your best interests to secure one. The premiums will be assessed on your stated value, but should there be a claim and the research reveals the values were overstated, you will not get the degree of coverage you paid for. Just as with jewels, fine art, or furs, if you over-insure your property, all you accomplish is making the insurance company wealthier.

An insurance appraisal should be figured at replacement cost — the price you would have to pay if you went out and replaced the collection buying from dealers or at auction. It should not matter whether you paid $10,000 for the collection or $200,000; if it would cost $100,000 to replace it today, that's exactly how much you should insure it for. The pertinent point here is that this is a retail appraisal, probably the only instance in which that is most beneficial to the owner. You should make sure the appraiser understands that the purpose is for insurance, as most appraisals are for liquidation value.

Premiums vary by company, but by far, the cheapest coverage is in force when your collection is always in a safe-deposit box. This may seem unnecessary, but in the 1980s, a friend's substantial collection was stolen from his safe-deposit box when a large bank in Boston was broken into over the weekend. Rare, but it happens. Another client's bank vault was flooded for five entire days. Figure to pay one-half percent for annual safe-deposit box coverage ($500 for $100,000) and at least double that if you want coverage outside the bank. Special circumstances may require additional premiums, so read the policy language carefully for exceptions and ask any questions you feel are necessary for you to fully understand the policy.

Appraisal For Divorce

If you are getting a divorce and a collection is among the marital assets, you will most likely be required to get it appraised. Finances allowing, one party may want to keep the collection rather than have it sold and the proceeds divided. This could create one more conflict during the divorce. The spouse wanting to keep the collection will hope for a low appraisal, while the selling spouse will hope for a higher one. The fairest way to obtain a Divorce Appraisal is to take the collection to two or three reputable dealers (three is optimal, but may be unnecessary and expensive if the first two are within 20% of each other). Tell each dealer you need a written appraisal of what they would pay to buy the collection outright. Expect the appraisal/offer to have a time limit of as little as one week.

Assuming that the collection is not to be split up, a "one figure" appraisal (e.g. the sum total offer is $20,000) should be sufficient versus pages of individual offers that would increase the appraisal cost unnecessarily.

Selecting an Appraiser

Selecting the appraiser is the most important part of the process. In addition to the qualifications mentioned earlier, you are looking for someone who will represent your best interests in providing a knowledgeable and honest evaluation of your collection. Further, the evaluation should match the needs of the situation it is addressing. That said, you still need to maintain the responsibility of looking out for your own interests.

If your collection is made up of coins, your appraiser should be a life member of the American Numismatic Association (ANA), a member of the Professional Numismatists Guild (PNG), be established for at least five years (and preferably ten) in the same area, have financial references from a reliable bank and have a solid reputation with knowledgeable collectors. This is ideal. Depending on your location and the relative value of your collection, you may choose (or have) to settle for less, but these are the qualifications you should be seeking. If you have a significant collection, it is probably in your best interests to incur higher expenses (if necessary) to engage an appraiser at this level. Remember, such expenses are usually deductible.

What Will it Cost?

A formal appraisal can be an expensive undertaking, but the important considerations are that it's done right and that the expense is appropriate relative to the value of the collection. Expect to pay $100 an hour on average. Some small town dealers charge $50 - $75 per hour, dealers in large cities or "high rent" districts tend to charge $125 - $150 per hour, so $100 is a good average. If the collection is significant and the material is rare or esoteric, or if the situation is complex or unusually contentious, you may need the services of a top-rate professional. Their rates can rival that of a law firm's $250 - $500 per hour. We would emphasize, however, that such a level of expertise is usually not necessary for most collections.

In qualifying a dealer, ask for an approximate charge after discussing the scope and purpose of the appraisal. If the dealer won't commit to a figure (say "2-3 hours, no more than 3," for example), find someone else who will. Remember, a "one price," liquidation appraisal will require a lot less time (and expense) than a line by line, individually-bid "grocery list." You may not even have to pay for the former at all. Some dealers will give you a dated, written offer to purchase your collectibles on a no-obligation basis. Unless you need insurance appraisal values, that offer would suffice as a liquidation appraisal. Others may charge you for a written appraisal with the proviso that if you sell them the collection by an arbitrary date, the appraisal fees will be rebated. Dealers would much rather buy collections than appraise them and you can use that leverage to your advantage. In all fairness, however, if someone does a "free" appraisal, you should at least give them the opportunity to bid when you make a decision to sell.

Safety of Collectibles During Appraisal

It is your responsibility to ensure the safety of your collection during the appraisal. You should expect it to cost more, but once you have selected an appraiser, the safest method is to have the appraiser come to your bank. A true professional will make an inventory if one does not already exist and then make evaluation notes right there in the tiny safe-deposit room. The appraiser will then take the notes back to his office to determine values and assemble the appraisal. Tell the appraiser when you need it, and don't forget to ask for an estimate on time. Even a modest collection, appraised under these ideal conditions (ideal for you, but NOT necessarily for the dealer) will probably be charged at several hours.

A less expensive alternative is to take the collectibles to the dealer and sit with them while the appraisal notes are being made, returning at an agreed upon date to pick up the appraisal. If your location or schedule requires you to either ship or leave your collection for appraisal, you should put a little more effort into qualifying your appraiser. This is simply good business and a natural step in assuring the safety of your collection.

In summary, determine the scope of your collection and what you are trying to accomplish with an appraisal, select the professional who combines the qualifications and economies best suited to your situation, and safeguard your collection during the process.

TIPS FOR HEIRS:If you have created a basic inventory where none existed previously, try to get a "ball park" estimate of the collection's worth in your initial discussion with potential appraisers. Because the condition of any collectible is such an issue, they may be reluctant. They should, however, be able to tell if you're dealing with a few hundred, a few thousand, or something of greater value. That information should help you gauge the economies of the process. At that point, we would recommend that you spend a little more time qualifying your appraiser if you are not a collector and are unfamiliar with "who's who" in the marketplace.