The purpose of estate tax planning is to maximize the assets you pass on to future generations by minimizing gift and estate taxes. Estate-tax strategies revolve around the use of irrevocable trusts. This article discusses the most common types of irrevocable trusts that are used to minimize gift and estate […]
Making lifetime gifts in order to minimize future estate tax liability is smart. However, people gifting assets other than certain liquid assets like cash or public stock will need to get the gifted asset(s) appraised. This article explains what constitutes a “qualified gift tax appraisal” and why these appraisals are necessary.
A qualified appraisal is a formal assessment of an asset’s fair market value that meets the IRS’s standards. A qualified appraiser conducts the valuation, providing a report that verifies the asset’s worth.
The appraisal determines the value of the asset that you have gifted. This is important because the value of the gift determines how much lifetime gift tax exemption you’ve used by making the gift. The appraisal is then attached to your gift tax return (Form 709). The IRS uses the appraisal to confirm the value of the gifted asset.
Gifts of cash, publicly traded stock, and/or bonds do not need to be appraised because they have easily determinable values. Other assets do need to be appraised. The most common assets that require appraisals are:
People often ask whether appraisals are necessary. The answer is an emphatic “yes.” The amount of lifetime gift tax exemption that you report using on your gift tax return will be based on the purported fair market value of the asset you transferred. If you claim that a gifted asset was worth $2 million, but you don’t have proof in the form of an appraisal, the IRS can easily come back and say it’s actually worth $3 million — and you won’t have much basis to dispute the IRS’s conclusion. In some cases, you may even be subject to gift tax and penalties as a result of allegedly underreporting the value of a gift. An appraisal that costs a few thousand dollars could save you and your heirs far more than that.
A 409A valuation is a type of valuation that’s used to determine a privately held business’s valuation for equity compensation purposes. Unfortunately, 409A valuations are not considered qualified appraisals for gift tax purposes. So even if you have a 409A valuation, you’ll need to get a new gift tax appraisal done.
You don’t need an appraisal in order to gift an asset. You can get an appraisal later. But the appraisal should be dated as of the date that the property was transferred — or as close as possible to that date. So, for example, if you gift an asset on February 1, you can wait until June 1 to find an appraiser (though we recommend that you find an appraiser as soon as possible!), but the appraised value should be based on the property’s fair market value on or around February 1.
As alluded to above, the appraisal must be completed in time to be filed with your gift tax return. Gift tax returns are due on April 15 of the year following the year when a gift is made, but the deadline may be extended to October 15.
The preparation of a qualified appraisal follows specific IRS guidelines to ensure compliance. Here’s an overview of the process:
File with Tax Return: The appraisal must be submitted with IRS Form 709.
Hire Qualified Appraiser: The IRS requires a “qualified appraiser” to perform the appraisal. Qualified appraisers typically hold relevant certifications, licenses, and credentials and have experience valuing similar property types. If you need help finding an appraiser, Valur can recommend one.
Appraise the Asset: The appraiser conducts a detailed analysis of the asset, considering factors like market conditions, historical performance, comparable sales, and unique characteristics. The valuation approach may vary based on the asset type; for example, real estate might be assessed based on comparable properties, while business interests could be evaluated based on cash flow and revenue projections.
Appraisal Report: The appraiser provides a comprehensive report detailing the asset’s fair market value, methodology, the property’s condition, and other findings. The report should meet IRS standards, which include an explanation of the valuation methods used, a description of the asset, and supporting documentation like financial statements for business interests.
By securing a qualified appraisal for gifted assets like real estate, private business interests, and collectibles, you can establish the fair market value of your gift and minimize the chances that the IRS will challenge the value reported on your gift tax return.
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