5 Reasons To Include an Appraisal in the Estate Planning Process

Estate Planning and Appraisals

appraisals and estate planningEstate planning is an important part of an overall financial plan for you and your family. Since your home and other real estate that you own is a significant part of your overall wealth it is important that it be handled correctly.

Today I thought I would share some thoughts on how appraisals can assist you in the planning process.

Why get an appraisal for estate planning?

1) Establish value when gifting- What is gifting? Gifting involves giving assets to others while you are alive so that you reduce your estate taxes.

The amount of the gift is deducted from the fair market value of the asset in order to determine your tax burden. An appraisal will help you determine the fair market value of the asset for the Internal Revenue Service.

2) Reduce the chances of an IRS audit- In addition to establishing the fair market value of the asset you are gifting, an appraisal can help reduce the chances of an audit. The IRS states that you should obtain a “qualified appraisal” which should be performed by a qualified appraiser according to the “substance and principles of the Uniform Standards of Professional Appraisal Practice (USPAP) as developed by the Appraisal Standards Board of the Appraisal Foundation”.

What this means is that the value you come up with for your real estate should be from an appraiser who completes the appraisal per USPAP as opposed to a tax assessor value or a CMA from a real estate agent, or even worse a Zillow Zestimate.

3) The cost of an appraisal is tax deductible- The cost of the appraisal on an estate tax return is usually tax deductible and may also be for estate planning but you should always check with your tax preparer.

4) An appraisal can assist the attorney in structuring an estate plan- It is helpful for an attorney to know the value of your real estate when they are structuring an estate plan. An appraisal will give them the current fair market value, however, this can be updated in the future to reflect the current market and home values in the area.

5) An appraisal can establish a reference point for the value of your assets- As noted above, the appraisal will provide a reference point for the value of your home or other real estate. Since real estate markets change it is a good idea to get an annual update of the value of the property so that your estate plan reflects the current value of your assets, whether that shows an increase or a decrease in value.

Best practices for hiring an appraiser

When you hire an appraiser for estate planning you will want to make sure they have the right amount of education, experience, and qualifications so the IRS rule is satisfied. Here are my tips for you to consider when choosing an appraiser.

Experience- Knowledge is usually built up over time and there is no substitute for the years of experience an appraiser has put in. Being in the business myself for around 25 years I have seen the cycles in real estate that have occurred which gives a unique perspective when valuing your home.

When interviewing the appraiser you want to use ask them how long they’ve been appraising and what markets they work in, which brings me to the next tip.

Education- In addition to experience, an appraiser must have the education to appraise properly. Each state has a required number of education hours that an appraiser must meet before becoming certified but they must also keep up their continuing education hours after they have their license.

Continuing education can help them keep up to date with current appraisal methods and business practices. A good appraiser can provide you with a resume showing their education and experience.

The bottom line is that you will want the appraiser to complete the appraisal per USPAP guidelines that they have learned in their educational requirements.

Professional affiliation- It is not a requirement for an appraiser to be a part of a professional organization, however, I believe that those who do for the most part provide a better service. State licensing only sets the minimum standard for obtaining a license, however, organizations like the Appraisal Institute which I belong to, go above and beyond these minimum requirements and require its members to take additional classes in different subjects that make its members better-rounded appraisers.

You might want to ask your potential appraiser if they have any professional appraisal designations when speaking with them up front.

Questions?

I hope this has been helpful in learning more about how an appraisal can be helpful in the estate planning process. If you have any other questions feel free to leave a message below and as always thanks for reading.

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Comments

  1. Great stuff Tom. My business is built around estate appraisals.

  2. Nice job Tom. These are great tips. I find on a practical level an appraisal can help heirs have a definitive starting point for value. Sometimes one heir will believe value is much higher or lower, so it simply helps people make decisions about a property instead of doing nothing with it because of disagreements.

  3. Nice article Tom! I like the best practices you mentioned for hiring an appraiser. I think those are all very important.

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