Performing estate appraisals can be a way to increase your business, build your network, obtain experience, and can even open the door to offering expert witness testimony. Because they are non-lending appraisals, estate appraisal assignments can provide income during slower periods in the real estate market. There are five common types of estate appraisals, and the intended use will impact how you develop your assignment results.
We’re providing a closer look at these five types as well as sharing foundational information to help you get started.
The need for estate appraisals
Obtaining an appraisal during estate planning can helps the property owner determine how to distribute their estate and understand its value. A valuation performed after the owner’s death may be used to fulfill legal requirements for probate proceedings and estate settlements, ensure fair and equitable distribution to heirs, aid in calculating estate taxes, and reduce legal disputes related to asset distribution.
Taking on an estate appraisal assignment
While appraisals completed for a lender may not require much pre-assignment discussion with the client, estate appraisals need to start with an in-depth conversation. The type of estate appraisal and its intended use will impact how you develop the appraisal and prepare the report, so you will need specific details about the assignment to get started.
Who are the intended users?
Estate appraisals are commissioned by various parties, such as the executor, trustee, heirs of the estate, attorneys, probate courts, and others involved in trust distribution. Prior to agreeing to perform the assignment, you need to obtain information from the client that will help you identify intended use and intended users. You will need to communicate with the client to identify the stakeholders who they want to have access to the valuation and with whom you can discuss your findings. Clarify in your engagement letter and report that only specified individuals are intended users.
You’ll also want to ascertain if the appraisal is needed for estate tax or donation purposes, which could trigger the need to comply with IRS requirements.
What is the appraisal’s effective date?
You may be asked to perform a retroactive appraisal based on the date of the trust’s establishment, date of death, or date of donation. Alternatively, it is possible that a current value opinion could be required. Be sure to discuss this with the client and specify the effective date in your engagement letter.
Defining value in an estate appraisal
One additional question you will need to answer before beginning your appraisal is the type and definition of value sought. This definition will vary based on the intended use of your appraisal. For example, the IRS has its own definition of fair market value. You will need to include the appropriate definition in your report and also cite the source of the definition.
5 Types of estate appraisals
Before you begin gathering and analyzing data, you need to determine the type of estate appraisal and its intended use, as this information will impact how you develop your assignment results and prepare your report. Five common types of estate appraisals are:
1. Pre-listing estate appraisal
Pre-listing appraisals typically involve a situation where the estate needs to know the value of a property, usually after the owner’s death. In most cases, the estate is planning to put the property up for sale and they are seeking guidance on how much to ask or what offers to accept. These appraisals usually involve a current effective date.
Pre-listing appraisals usually do not involve taxes or the IRS, so it is unlikely that you will need to follow other standards or requirements in addition to USPAP.
2. Donation appraisal
An appraisal might be needed to determine the value of donated property for tax purposes and benefits. The owner either has donated or plans to donate a property to a charitable organization and needs to establish a value for a write-off. Donation appraisals can be related to an estate, or they can be for living individuals seeking tax benefits. In most of these cases, the effective date of the appraisal is the date of the donation.
Before beginning work on an appraisal for this intended use, determine whether attorneys or financial planners are involved, as they may need to be included among your intended users. You will also need to use and reference IRS Form 8283 (Noncash Charitable Contributions) as a part of your valuation.
3. Estate tax appraisal
Estate taxes are levied on the value (usually the net value) of a deceased person’s estate before distributing funds and assets to heirs. As an example, you might be asked to develop an appraisal of the value of the decedent’s house, commercial property, and land so that the estate can correctly report the value of those properties to the IRS and/or other taxing body. Estate tax appraisals will generally be retrospective because the client needs to know the value of the property as of the date of death.
This type of appraisal may involve the IRS, and if so, you will want to review the IRS requirements and use the appropriate definition of fair market value. You will also want to review whether the state or local government has any requirements around estate taxes and/or inheritance taxes that you will need to consider.
4. Estate trust appraisal
A trust is an arrangement that allows a third party to hold assets on behalf of a beneficiary or multiple beneficiaries. A trust specifies when and how assets are distributed, so it’s usually much faster than the court-controlled probate process. For example, the trust documentation might specify, “The house goes to this person. The boat goes to this person. The vacant lot goes to this person.”
Depending on the type of trust and the timing, an appraisal could be needed after a person dies or it could be needed when the trust is first being set up (while the person is still living). For some trusts, the client will need the current value of the property when they establish the trust. So rather than doing a retrospective appraisal, you would be valuing the property as of a current date. If the property owner has died, the trust may need a retrospective appraisal based on date of death or a current value as of today to determine changes in value after death.
5. Probate estate appraisal
If a person dies without a will or their will is contested, a probate court will handle and distribute that person’s estate. To do this, the court must identify and inventory the properties included in an estate, value those properties with an appraiser, and distribute property and funds. This can be a long and drawn-out process.
As an appraiser, you are only involved in the valuation part of the probate process. You aren’t going to court to hear or help decide property distribution. Your role is merely to develop and report your appraisal of the real property.
The top mistake in an estate appraisal
Estates can come with a hefty dose of family drama, which can spill over into professional interactions. As an appraiser, you are an objective third party and must remain independent, impartial, and unbiased, even if parties involved with the estate pressure you or are hostile towards you. Your best protection is your professionalism and strong documentation. Make your responsibilities clear from the start by including them in your engagement letter.
Take the next step with CE Courses
If you want to learn more about estate appraisals, McKissock Learning has appraisal continuing education courses you need to help you succeed:
- Divorce and Estate Appraisals: Elements of Non-Lender Work
- Residential Report Writing: More than Forms
- Supporting Your Adjustments: Methods for Residential Appraisers
- Introduction to Expert Witness Testimony for Appraisers: To Do or Not to Do
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