By ALAN S. NOVICK
Scripps Howard News Service
09-JAN-06
In modern estate planning, giving away low value property and fractional shares of property to produce transfers of wealth at bargain prices is standard technique for reducing estate taxes. The possibility of using small gifts, with discounted values, to transfer family businesses and real estate require the engagement of a well-qualified appraiser who will produce an appraisal report that is valid and convincing.
There are at least a few things to be aware of in judging and understanding the appraisal report.
The two elements of a sound appraisal are an accurate factual basis and the application thereto in conformity with the law of those principals of valuation that will establish damages at a fair and reasonable amount.
The quality of the appraisal depends to a large extent on the legal soundness of the method the appraiser uses to arrive at this conclusion.
The written appraisal report must contain a great deal more than the conclusion of the appraiser. It must include not only all of the facts on which that value judgment is based, but a careful exposition of the reasons for the application thereto of one method of measuring fair market value rather than another. In some cases, an appraiser may properly and prudently evaluate the facts by more than one method in the same report. The legal and logical validity of a careful presentation of the method by which an appraiser arrives at his valuation may often be as important as the valuation itself.
Documentation in support of the reasoning process of the appraiser is essential to intelligent and deliberate consideration of the conclusions of the appraiser, be it by the IRS or by a court of law.
The appraiser must always have in mind the possibility of attack on his appraisal in a court proceeding. He must be prepared to defend his conclusions by careful presentation of the facts and principles of valuation upon which his conclusions are based. The fact that such a confrontation may occur some time after the fact, when the matter is no longer fresh in his mind, increases the significance of the well-documented appraisal report. It must also be noted that careful and thorough initial appraisals, establishing value in fair and reasonable amounts, will assist the client in persuading the IRS that litigation would be an unproductive and possibly detrimental expense.
The ultimate aim of an appraisal report is to establish the fair market value of the property being valued. Fair market value, is the price which a willing buyer would pay to a willing seller in an open market, free of coercion, economic or social or governmental, each having reasonable knowledge of relevant facts.
Market value is the price that would be acceptable both to a willing seller and a willing buyer in a free and open market.
Market value, therefore, is not the value of the property to any particular person. It can only be determined by putting aside the needs, desires and personalities of the parties actually involved. The appraiser must pretend instead that the property belongs to some imaginary person, who is willing to sell it to another imaginary person who is willing to buy it, and that it is being sold in the free and open market. The highest price for which it would sell between these imaginary parties in that totally un-coerced market place it its market value.
An additional element must be included in this theoretical situation by the appraiser. Not only must he conceive of a free and open sale, but he must also ignore the fact that there is to be any gift or transfer to others and who the transferees are.
The valuation is based on the value of that property for the highest and best available uses to which property is naturally adapted and to which lawfully it may be dedicated may be considered in determining its market value. Of those uses, the appraiser must select the one to which the property can be most advantageously and profitably devoted. The appraisal report will enable the family's attorney and accountant to advise the client as to how much should be given away each year, and the form in which it should be given. Working together, this team should be able to produce a comprehensive and favorable plan for the transfer of family wealth.
(Attorney Alan S. Novick is a wills, trusts and estates lawyer. E-mail estate planning questions to an304@aol.com.)
