Husbands and wives who own property and other assets often establish a living trust. A trust avoids probate, protects assets and insures that beneficiaries receive the assets according to the wishes of the owners, called grantors. Upon the death of the last grantor, the trust becomes irrevocable. Real property must be appraised, because the property gets marked up or down to the fair market value at the death of the final grantor.
Appraisals are Required
The Internal Revenue Service requires an appraisal of real property after the death of the final grantor for two reasons: To determine the value of the estate and to establish the basis of the property held in trust. If the estate value exceeds the currently enacted exemption amount, the value above the exemption is subject to estate tax. Even if the estate value falls at or below the exemption amount, an appraisal establishes the property's basis to the beneficiaries. An appraisal serves several purposes: It adds to the total trust value to calculate distributions to the beneficiaries, to determine gain or loss on the sale of property within the trust, and, for rental real estate, to recalculate the basis for depreciation as a deduction from trust rental income.
Appraisal Timing Issues
The trustee can choose one of two appraisal dates: Either the final grantor's date of death or six months after the death, called the alternative valuation date. The IRS sets no date for completing the appraisal, and the timing should be determined to take advantage of a rising or falling market and maximize any tax benefits. For example, if the estate is subject to the high rate of estate tax, which can be more than half the value of the estate, an appraisal may be timed to establish the lowest market value possible to reduce the estate tax. An appraisal must be completed before the estate tax return can be computed and filed. The tax return is due nine months after the decedent's death.
Appraisal for Trust Basis
To establish the property value in a trust, the trustee might want to time the appraisal to recognize the highest value possible. If the trustee sells the property within the trust or distributes it out to the beneficiaries to sell later, a higher basis minimizes the capital gains tax if it sells for more than the appraised value. For rental real estate, a higher value increases the depreciation expense against rental income.
High Value Estate Issues
For high-value estates, both the estate tax and the capital gains tax might be factors in determining the timing and valuation date of the appraisal. A qualified tax consultant can help calculate the tax consequences for the maximum benefit.
Retrospective Appraisal
An appraisal close to the date of death of the last grantor is the most accurate. However, a qualified professional appraiser can research historical records to perform a retrospective appraisal even years after the date of death. Estate tax returns have a high rate of audit by the Internal Revenue Service. If the IRS challenges the property's valuation, an appraisal near the date of death has more credibility than one done much later.