Considerations When Valuing Estate Assets

What About All the Stuff?

Irene derived great pleasure from her “stuff,” which varied from amazing collections of unique and beautifully crafted hats and eclectic costume jewelry to an unsurpassed assemblage of stationery, some of which she had inherited from her mother.

However, upon her passing, Irene’s family began sorting through her carefully stored collections to discover signs of hoarding. Bags within bags within bags were opened to reveal nothing more than trash, often comprised of old statements and junk mail. Initially, Irene’s family searched through her items thoroughly, but the search became less rigorous over time, especially when more and more bags revealed trash.

But then, to everyone’s surprise, Irene’s cousin came across more than $300,000 in Treasury bills, located at the heart of one of the countless trash bags. Irene’s family learned an important lesson through their experience: There is value in conducting a thorough review of estate assets, as you never know what you might find in someone’s personal treasures.

Estate overview

Generally, your estate consists of all your assets, either held individually or in your living trust, at the time of your death. Such assets may include funds held in bank or brokerage accounts, real estate, business interests, life insurance proceeds and more. Smaller assets — such as furniture, artwork and other personal property — are also typically included in your estate. However, because most personal property does not retain its value, such assets are often deemed to be virtually worthless for estate tax purposes.

Regardless of the perceived value of your stuff, special care should always be taken when sorting through personal property. More specifically, your personal representative should be on the lookout for any true collectibles owned by your estate. Unlike other personal property, collectibles are items which are extremely valuable and may be very rare, like a piece of fine art or jewelry. Because collectibles typically appreciate in value, it is important to be aware of them and the impact they may have on the value of your estate.

Estate valuation

For those with large and potentially taxable estates, it’s necessary to complete an estate tax return to determine the amount of estate tax due. If the total value of a decedent’s estate is over the amount of their remaining lifetime credit¹, the excess amount will be subject to a 40% estate tax.

The estate tax return includes a schedule of all the estate assets and their values (generally determined as of the date of death). If an estate tax return is required to be filed at your passing, your personal representative will prepare an inventory of all your property and, if needed, will hire appraisers to value some of your assets. Once complete, your personal representative will provide the inventory to the individual preparing your estate tax return to finalize the schedule of assets.

Appraisals

As we mentioned, an appraisal may be necessary for certain assets, such as real estate and personal property. Because these items are typically difficult to value, it’s best to hire a professional to ensure that they are accurately reported on the estate tax return.

The cost to appraise personal property depends on a several factors, such as:

• How many items need to be appraised
• Whether the items can be appraised as a group, as opposed to reviewing each item separately
• Where the items are stored (are they easily accessible or difficult to view?)
• Whether the items are common or unique

There are different types of professionals you can choose to conduct the appraisal, such as an individual professional appraiser or an auction house (regional, national or international). One type of appraiser may be a better fit than the others, depending on the four factors. Thus, your personal representative should be able to provide this information to a prospective appraiser.

Sometimes, when an item has already been appraised, your personal representative may wish to avoid the cost of re-appraising that item by using the previously completed appraisal to report the value on the estate tax return. Such appraisals may be relied upon, so long as the appraised value is still reasonably accurate. However, be aware if the valuation was written for tax purposes or insurance. If your assets are not appraised accurately, potential negative consequences may arise.

Overstating the value of one or more assets could result in an overvaluation of your estate and a higher estate tax liability. On the other hand, understating the value may create unnecessary income tax consequences to your heirs. Because inherited assets receive a step up in tax basis at death, your heirs will have the opportunity to immediately sell your assets with little to no taxable gain. However, basis is only stepped up to the value you have reported on your estate tax return, so undervalued assets will be subject to more taxable gain upon sale than if they had been valued correctly.

One way to ensure an accurate appraisal is to determine how recently it was completed. There is no magic number for how long an appraisal is accurate, so, to be safe, ask a trusted appraiser for their opinion. Further, as previously mentioned, it is important to be aware of the original purpose of an appraisal. For example, if you have insured one or more assets, you may be tempted to report the value of that asset as determined for insurance purposes. However, valuations for insurance purposes tend to overstate the value of assets and, therefore, using such a value could mean more estate tax.

When assets lose value or go unwanted

Nancy had a home filled with the highest quality collectibles. Whether it was the Baccarat crystal or the first-edition, author-signed novels, all of her objects of admiration were of the finest caliber and impeccably maintained. Except for, as her family discovered, the wine gifted to her over more than seven decades — wine that would have been worth substantially more if she had curated it with the same level of care she provided her other things. Unfortunately, the closet used as a makeshift wine cellar was not climate controlled, turning these exceedingly valuable wines into unmarketable, and thus worthless, wine. What could have garnered the estate more than $200,000 at a wine auction was sold en masse for a few thousand dollars to speculating wine dealers.

Unfortunately, Nancy’s situation is common. Many people overestimate the value of their belongings, often because of their emotional attachment to them. In some cases, these treasured objects may have deteriorated over time due to poor maintenance or improper storage. Other times, a decedent may have invested a large sum of money in certain collections that have failed to maintain their value. An appraisal of such assets can serve as an effective reality-check and can save your personal representative from overvaluing the estate and unnecessarily adding to your estate tax liability.

Of course, the sentimental value of your personal items should not be overlooked. These items may have been passed down to you from older generations or may have special meaning to you and your heirs. Because this aspect of estate administration is deeply personal, it’s best to be proactive and have periodic discussions with your family and friends about their expectations and desires regarding such assets. With your loved ones’ input, you can determine which items are worth passing on and who should receive them, as opposed to leaving unwanted or burdensome assets to certain heirs who may feel pressure to hold onto them. If you make sure everyone is on the same page, you are more likely to prevent future disputes or discomfort that may otherwise arise after your passing.

Staying organized

Organization is also imperative for a seamless estate administration process, and it’s best to get started during life. Scheduling periodic conversations with your heirs is a great way to get started, as these discussions may help you decide which assets, if any, should be donated or thrown away. It may also be helpful to keep a catalogue of any valuable personal property or collectibles owned, along with details about where to find them or if any recent appraisals have been completed and can be relied on during administration.

Most importantly, take some time to revisit the terms of your living trust every few years and confirm that such terms reflect your current wishes. If desired, you can update your living trust to appoint certain personal property or collectibles to loved ones. Some law firms also provide a form to allow you to easily make more frequent changes to personal property gifts without having to amend the living trust.

Being organized and proactive when it comes to your stuff can be a gift to your personal representative who is administering your estate. For those you leave behind, wading through your belongings can be time-consuming, for sure, but — more importantly — it can be emotionally draining and challenging. Consider working with your advisors and estate planning attorneys to determine how you can most effectively implement these strategies as you manage your estate.

Endnotes

¹The lifetime credit is the total amount that you can give away, either during life or at death, free of gift or estate tax. For 2021, the lifetime credit is $11.7 million per person.